Question

An increase in the price of hot dogs from $1.50 to $2.10 per pound increased the average number of burgers demanded per week from 300 to 360. Assuming that all other economic variables were held constant, what is the cross-price elasticity of demand between hot dogs and burgers? What does this elasticity tell you about the relationship between the two?

Answer 1

Answer:

0.5

They are substitute goods.

Explanation:

Cross price elasticity of demand measures the responsiveness of quantity demanded of good A to changes in price of good B.

Percentage change in quantity demanded of burgers = (360 - 300) / 300 = 0.2 = 20%

Percentage change in price of hot dog = (2.10 - 1.50) / 1.5 = 0.4 = 40%

Cross price elasticity of demand = percentage change in quantity demanded/ percentage change in price

20 / 40 = 0.5

Elasticity of demand is less than 1, so demand is inelastic.

Also, the cross price elasticitiy is positive, so the goods are substitutes goods.

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