Question

This question focuses on the idea of cross price elasticity (in effect, peanut butter and jelly) and the idea of complements and substitutes. We analyze data to see how the price of one product will affect the demand for another product.

If your company produced Pallets, and you are provided analysis such that the demand for Pallets is estimated to be

Q_a= 1000 – 0.75p_a+ 12p_X – 21p_Z + 0.12Y

Note that p_a= 80, p_X= 50, p_Z= 150, and Y = 20,000; answer the following:  

You can either do this using calculus or an excel spreadsheet—both work. If you use calculus, show your work; if you use a spreadsheet, please submit the spreadsheet.

1. What is the price elasticity of demand for Pallets?  

2. What is the cross price elasticity with respect to commodity A and Z? In this example, the price of Good Z rises—what happens to the quantity demanded for Good A.
3. Give an example of what commodity Z might be and what is the meaning of the cross price elasticity in this case. Note that the product you produce is a Pallet.
4. What is the income elasticity?

Answer 1

C) In this case, both the goods are Complementary goods as Complementary goods have a negative cross- price elasticity: as the price of one good increases, the demand for the second good decreases. So if Price of Commodity Z increases then there is a fall in demand of Quantity A.