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Cross elasticity of demand

3. Acme Tobacco is currently selling 5,000 pounds of pipe tobacco per year. Due to competitive pressures, the average price of a pipe declines from $15 to $12. As a result, the demand for Acme pipe tobacco increases to 6,000 pounds per year.
a. What is the cross elasticity of demand for pipes and pipe tobacco?
b. Assuming that the cross elasticity does not change, at what price of pipes would the demand for pipe tobacco be 3,000 pounds per year? Use $15 as the initial price.

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a. What is the cross elasticity of demand for pipes and pipe tobacco?
Sometimes the price of one good will shift the demand for another good. For example, an increase in the price of tea will increase the demand for coffee. This is measured by the cross-elasticity of demand. If the cross elasticity is positive, it means that an increase in the price of one good will increase the demand for the other good. If the price of digital cameras rose by 2% it will ...

Solution Summary

This discusses the steps to compute the cross elasticity of demand

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