Good Y has a cross elasticity of demand with respect to Good X calculated using the average method of –1. Initially 100 units of Good Y are demanded when Good X costs 20 pence. A rise in the price of Good X to 25 pence will result in a new level of demand for Good Y of: A 125 units. B 95 units. C 80 units. D 70 units. May i know how should this be calculated?
Hi Pxliang, This question requires use of the average method to calculate cross-price elasticity of demand (CPED). The general formula is: CPEDx,y = % change in Qy / % change in Px For the average method, this becomes: CPED(x,y) = (change in Qy/average Qy) / (change in Px/average Px) The question states that the value of this is -1. We can substitute in the known figures from the question, and in turn, use the other figures from options A-D until the result is -1 as required. Thanks, Richie
