If Starbucks raises its price by 5 percent and McDonald’s experiences a 0.5 percent increase in demand for its coffee, what is the cross-price elasticity of demand?

Instructions: Round your response to two decimal places. If you are entering a negative number be sure to include a negative sign (-) in front of that number.

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28-03-2020
Business

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If Starbucks raises its price by 5 percent and McDonald’s experiences a 0.5 percent increase in demand for its coffee, what is the cross-price elasticity of demand?

Instructions: Round your response to two decimal places. If you are entering a negative number be sure to include a negative sign (-) in front of that number.

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cecepham cecepham · Answer 1 · 2020-04-02T20:15:19+02:00

Answer:

Cross-price elasticity of demand = 0.1

Explanation:

We have the formula to calculate the cross-price elasticity of demand as below:

Cross-price elasticity of demand = % change in quantity demanded for product X/ % change in price of product Y

Starbucks raises its price by 5 percent, so that percentage changes in price of Starbucks' products are 5

McDonald's experiences a 0.5 percent increase in demand for its coffee, so that percentage changes in quantity demanded for McDonald's coffee is 0.5

=> Cross-price elasticity of demand = % changes in quantity demanded for McDonald's coffee/ %changes in price of Starbucks' products

= 0.5/5= 0.1