Answer:
-1.25
Explanation:
Given that
Q1 of tomatoes = 3
Q2 of tomatoes = 5
P1 = 1.50
P2 = 1
Using midpoint formula
Recall that
Midpoint = [(Q2 - Q1)/(Q2 + Q1/2)] ÷ [(P2 - P1)/(P2 + P1/2)]
Thus
(5 - 3)/(5+3/2) ÷ (1 - 1.5)/(1 + 1.5/2)
= 2/4 ÷ -0.5/1.25
= 0.5 ÷ -0.4
= - 1.25
The cross price elasticity of demand is -1.25 and they are thus compliments.
Answer: Cross-price elasticity of demand is -1.25, and spinach and tomatoes are complements.
Explanation: From the question above, we have:
Q1 for spinach= 4 boxes
Q1 for tomatoes = 3 pounds
Q2 for spinach= 5 boxes
Q2 for tomatoes= 5 pounds.
P1= $1.50
P2= $1
The midpoint formula is given as:
[(Q2 - Q1)/(Q2 + Q1/2)] ÷ [(P2 - P1)/(P2 + P1/2)]
Therefore, using the midpoint method the to compute the percent change in quantity of good tomatoes, we have:
(5-3) / [(5 + 3)/2] = 0.5.
To compute the percent change in price of spinach, we have:
(1.00-1.50) / [(1.00+1.50)/2] = -0.4.
Now, by dividing the percent change in quantity of tomatoes by the percent change in price of spinach we will get the cross-price elasticity of demand, thus:
=> 0.5/-0.4= -1.25.
From the answer, we can conclude that, when two goods have a negative cross-price elasticity, they are complements.
