Student Name:
21 August 2010
Total Possible Marks: 15
Cross Price Elasticity of Demand
Complete in pen or pencil and hand into your teacher when ready. Each
multiple choice question carries one mark. Select one answer only.
A quick recap: Cross price elasticity of demand refers to the percentage change in the quantity demanded
of a given product due to the percentage change in the price of another "related" product.
1.
If CPeD > 0 then the two goods are [A]substitutes
2.
If CPeD =0 then the two goods are [A]independent (i.e. no relationship between the two goods
3.
If CPeD < 0 then the two goods are [A]complements
4.
An increase in the price of hot dogs from £1.50 to £2.10 per pound increased the average number
of beef burgers demanded per week from 300 to 360 Assuming that all other economic variables
were held constant, the cross-price elasticity of demand between hot dogs and beef burgers is
[A]+0.5 or 1/2 which indicates that the two goods are [B]substitutes
5.
A café observed an increase in the demand for its coffee following a rise in the price of a cup of
tea from £1.20 to £1.50. Assuming the cross price elasticity of demand for coffee with respect to a
change in the price of tea is +0.8, by how much (in per cent) will the demand for coffee have
increased?
1
1
1
2
1
20 per cent
6.
1
The price of good X falls by 15 %. As a result, the demand for a substitute good Y rises by 30 %.
What is the cross-elasticity of demand for good Y with respect to good X?
-2 (i.e. the two goods are close complements)
7.
1
If the cross-price elasticity of demand for Coke and Pepsi is 0.6 and presently 1000 units of Coke
are consumed, how many units of Coke will be consumed if the price of Pepsi increases by 10%
The percentage increase in quantity demanded for Coke= 10 x 0.6=6%. So the demand will be
1060 Cokes.
8.
1
Good Y has a cross price elasticity of demand with respect to Good X of 0.5 and...