Question

If the cross price elasticity of this product is —2 by how much and in what direction the demand for jets will change if the price of steel decreases by 20% illustrate your answer with a graph please!

How firms can get around the stickiness of price? Illustrate your answer with a graph AHR Price of Jet (millions) Quantity of jets demanded Quantity of jets supplied 140 1200 1000 900 800 700 600 500 400 300 120 100 110 150 100 90 80 70 60 50 200 250 300 350 400 450 500 40 200 20 600 the eauilibrium price and

Answer 1

If the cross price elasticity of this product is —2 by how much and in what direction the demand for jets will change if the price of steel decreases by 20% illustrate your answer with a graph please!

Solution:

If the cross price elasticity is negative it means that steel and jets are complementary goods.

so if the price of steel decreases it lead to increase in the demand.

cross price elasticity = % change in demand of jets / % change in price of steel

-2 = % change in demand of jets / -20%

(- 20% as the price is decreasing )

% change in demand of jets = -2*-20% = 40%

as the sign is positive, the demand of jets will increase by 40% when the price of steel fall by 20%

Direction of demand of jet - Demand curve of jet shifts rightward

how much = 40% = 160 units (400*40%)

Here nothing is given so i am assuming that the market of jets were in equilibrium before price decrease of steel.

Qd = Qs = 400

P* = 60

as price of steel fall by 20%, the demand increases by 40% it means, at the same price ( jet price) of $60, the demand for jet rises to 400 + 400*40% = 560

Graph: