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

... Q1 = original quantity demanded Q2 = new quantity demanded P1 = Original ... Ep=-1.00 Absolute value of elasticity is 1, arc price elasticity of demand is unit ...

... consider is whether a given change in price will cause ... The demand for most products is such that consumers do ... in prices and the concept of elasticity tells us ...

Price Elasticity of Demand for Paint: Supply and demand from a microeconomics perspective. ... The formula for Price Elasticity of Demand (PeD) is: ...

... (c) If Mr. Miller spends all his income on steak (regardless of his income or the price of steak), his cross elasticity of demand between steak and any other ...

... (thetimes100, 2009) We can show this in a simple formula: Price elasticity demand = percentage change in quantity demanded divided by percentage change in the ...

... C. the cross price elasticity of demand= ---- ... Epx =. Where Epx = Coefficient of cross elasticity Q1 = original quantity demanded Q2 = new quantity ...