Question

Average Household Income Price of Transit Passes Year ($) Price of Quantity Demanded Quantity Demanded Gasoline of Gasoline of Transit Passes (S/litre) (millions of litres) (millions or ntres 99 000 0.95 1940 101 000 1.05 2012 80 000 80 000 60 60 2013 en no 2060 TABLE 4-5 10) 10) Refer to Table 4-5. The cross-price elasticity of demand for transit passes in terms of the price of gasoline is _. We can therefore conclude that these two goods are A) 0.5; complements B) 0.33; substitutes C) 0.2; substitutes D) 0.33; complements E) 0.2; complements

Answer 1

Cross price elasticiity of demand for transit passes in terms of gasoline price (CEd) = (% change in quantity demanded of Transift passes / % change in price of gasoline)

CEd = (% change in quantity demanded of Transift passes / % change in price of gasoline)

% change in quantity demanded of Transit passes = [(101000 - 99000) / 99000] * 100

% change in quantity demanded of Transit passes = 2.02

% change in price of gasoline = [(1.05 - 0.95) / 0.95] * 100

% change in the price of gasoline = 10.52.

CEd = (% change in quantity demanded of Transift passes / % change in price of gasoline)

CEd = (2.02 / 10.52)

CEd = 0.19

CEd = 0.20

The CEd value in positive it means the transit pass and gasoline are substitute goods.

Answer: Option (C) i.e., 0.2; substitute.