Question

If Starbucks raises its price by 5 percent and mcdonalds experiences a 0.3 percent increase in demand fir its coffee, what is the cross-price elasticity of demand?

Answer 1

When Starbucks increased the price of its coffee by 5 percent,  Mcdonalds reported a 0.3 percent increase in the demand for its coffee. To get the  cross-price elasticity of demand or the relationship between the two products, we use the following formula:

 

Cross-Price elasticity: formula is

Exy = (percent change in Quantity demanded of X) / (percent change in Price of Y).

Where

X =MCDo Quantity increase =.3%

Y= Srarbucks Price increase = 5%

Exy= .3/5

Exy=.06 or 6%