Question

Suppose the cross-price elasticity of demand between goods X and Y is -4. How much would the price of good Y have to change in order to change the consumption of good X by 50 percent?

Answer 1

Cross Price Elasticity of Demand is given by :-

E = Percentage(%) change in Quantity of X / Percentage (%) change in Price of Y

Using the above formula we can write as per our information:-

-4 = 50%/Percentage change in Price of Y

Percentage change in Price of Y = -50%/4 = -12.5%

So, Percentage change in price of good Y is -12.5%

Here negative sign is because the change in quantity of X and Price of good Y has opposite effects.

i.e. If Price of Y falls by 12.5% then quantity of X will rise by 50%.