The price of a banana has increased from £0.10 to £0.20. As a result quantity demanded of apples increased from 2.4 million units to 3.6 million units. Calculate the cross price elasticity of demand and interpret the value..
First we must use the formula to calculate cross price elasticity:
XED= percentage change in quantity demanded of good A/percentage change in price of good B
We are given the changes in quantity demanded for apples and the changes in price of bananas so apples are good A and bananas are good B.
Using the equation for percentage change:
Percentage change= (change in value/original value) x 100
So for apples the percentage change in quantity demanded equals:
(3.6-2.4)/2.4 x 100 = 50%
And the percentage change in price of apples equals:
(0.20-0.1)/0.1 x 100 = 100%
Plugging in our values we have to the formula for cross price elasticity of demand:
XED= 50/100 = 0.5
We can conclude that following a change in the price in bananas there will be a less than proportionate change in the quantity demanded for apples. Therefore, apples and bananas are weak substitutes.
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