According to a Ford press release in April 2013, sales of the fuel-efficient four-cylinder Ford Fusion rose by 4% in the first quarter. Over the same period, the average price of regular gasoline rose from 118.9 cents per litre to 129.4 cents per litre.
Using the midpoint method, calculate the cross-price elasticity of demand between the Ford Fusion and regular gasoline.
Are the 2 goods, gross complements or gross substitutes?
Cross-price elasticity = (Change in demand for Ford / Average demand for Ford) / (Change in gasoline price / Average gasoline price)
= 0.04 / [{(129.4 - 118.9) / [(129.4 + 118.9) / 2}]
= 0.04 / [10.5 / (248.3 / 2)]
= 0.04 / 0.0846
= 0.47
Since cross-price elasticity is positive, Ford and Gasoline are gross substitutes.
According to a Ford press release in April 2013, sales of the fuel-efficient four-cylinder Ford Fusion rose by 4% in th...