Theory question 101
ElasticitySection A: answer one question only from this section.
(a) Define cross elasticity of demand (b) The table shows the response of quantity demanded to changes in price for three pairs of commodities. Use the table to answer the questions that follow.
Changes in price: Bread: original price N15, new price N20; Beef: original price N25, new price N40; Butter: original price N100, new price N150
Changes in quantity demanded: Yam: original quantity 150 kg, new quantity 200 kg; Fish: original quantity 1,000 kg, new quantity 3,000 kg; Margarine: original quantity 250 kg, new quantity 400 kg
Calculate the cross elasticities of demand for (i) Bread and yam; (ii) Beef and fish; (iii) Butter and margarine.
Show the model answer
(a) Cross elasticity of demand is the degree of responsiveness of the quantity demanded of one commodity (X) to a change in the price of another commodity (Y)
CED = % change in quantity demanded of X ÷ % change in price of Y
(b)(i) % change in Qd of yam = 50/150 × 100 = 33.3%; % change in price of bread = 5/15 × 100 = 33.3%; CED = 1
(ii) % change in Qd of fish = 2,000/1,000 × 100 = 200%; % change in price of beef = 15/25 × 100 = 60%; CED = 200 ÷ 60 = 3.3
(iii) % change in Qd of margarine = 150/250 × 100 = 60%; % change in price of butter = 50/100 × 100 = 50%; CED = 60 ÷ 50 = 1.2
All three are positive, showing each pair are substitutes
Put the quantity change of one good over the price change of the other good.