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Implications and uses of cross price elasticities.

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The accompanying table lists the cross-price elasticities of demand for several goods, where the percent price change is
measured for the first good of the pair, and the percent quantity change is measured for the second good.

a. Explain the sign of each of the cross-price elasticities. What does it imply about the relationship between the two goods in question?
b. Compare the absolute values of the cross-price elasticities and explain their magnitudes. For example, why is the cross-price elasticity of McDonald's and Burger King less than the cross-elasticity of butter and margarine?
c. Use the information in the table to calculate how a 5% increase in the price of Pepsi affects the quantity of Coke demanded.
d. Use the information in the table to calculate how a 10% decrease in the price of gasoline affects the quantity of
SUVs demanded.

Good Cross-price elasticities of demand
Air-conditioning units and -0.34
kilowatts of electricity
Coke and Pepsi +0.63
High-fuel-consuming sport-utility vehicles
(SUV's) and gasoline -0.28
McDonald's burgers and Burger King burgers +0.82
Butter and margarine +1.54

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Solution Preview

a. If two goods are substitutes, we should expect to see consumers purchase more of one good when the price of its substitute increases. Similarly if the two goods are complements, we should see a price rise in one good cause the demand for both goods to fall. Because the cross price elasticity measures the change in quantity demanded of one good, due to a price change of another good, we will have positive numbers if the goods are substitutes, and negative numbers if they are complements.

b. Butter and ...

Solution Summary

Implications and uses of cross price elasticities.

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