(a) Define cross elasticity of demand. (b) The table below shows the response of quantity demanded to changes in price for three pairs of commodities. Use the table to answer the questions that follow.
Commoditychanges in pricecommodityChanges in Quantity Demanded
Original Price (N)
New price (N)
Original Quantity (kg)
New Quantity (kg)
Bread
15
20
Yam
150
200
Beef
25
40
Fish
1,000
3,000
Butter
100
50
Margarine
250
400
Explanation
(a)Cross elasticity of demand is the degree of responsiveness of demand for a commodity to changes in the price of another commodity. It is the proportionate change in the quantity of goods (x) demanded over the proportionate change in the price of another goods (y) demanded. = % change in quantity demanded of commodity x ,% change in price of commodity yor change \(\frac{QX} {QX} \times \frac{PY} {DPY}\) b(i) Cross elasticities of demand for bread and yam Let X = Yam, Y = Bread New demand = 200kg, Initial demand = 150kg Change in demand = 200 -150 = 50kg Initial price = N15, New price = N20 Change in price = 20 - 15 = N5 \(\frac{200-150} {150}\) x 100 = 33.3% \(\frac{20 -15} {15}\) x 100 = 33.3% or change QX x PY = 50 x 15 = 750 = 1 Py Qx 5 150 750 (ii) Beef and fish: Let x = fish, y = Beef Initial demand = 1000kg, New demand = 3000kg Change in demand = 3000 - 1000 = 2000kg Initial price = N25 New price = N40 Change in price = N40 - N25 = N15 Cross elasticity = change in \(\frac{Qx}{Qx} \times \frac{Py}{Py}\) \(\frac{2000}{1000} \times \frac{25}{15}\) = \(\frac{10}{3}\) = 3.3 or \(\frac{3000-1000} {1000}\) x 100= \(\frac{200}{60}\) = 3.3 \(\frac{40-20} {25}\) x 100 iii Let x = Margarine, y = Butter Initial demand = 250kg New demand = 400kg Change in demand = 400 - 250 = 150kg Initial price = N100 New price = N150 Change in price = N150 - N100 = N50 Cross elasticity = \(\frac{-QX}{QX}\) \(\frac{PY}{PY}\) = \(\frac{150}{50} \times \frac{100}{50}\) = \(\frac{6}{5}\) = 1.2 or \(\frac{400 - 250}{250}\) x 100 = \(\frac{60}{50}\) = 1.2 \(\frac{150 - 100}{100}\) x 100 =50