[amp_mcq option1=”$$\\frac{1}{2}$$” option2=”$$\\frac{2}{3}$$” option3=”$$\\frac{3}{4}$$” option4=”$$\\frac{4}{5}$$” correct=”option1″]<\/p>\n
The correct answer is $\\boxed{\\frac{2}{3}}$.<\/p>\n
The cross elasticity of demand is a measure of how responsive the demand for one good is to a change in the price of another good. It is calculated as follows:<\/p>\n
$$\\text{Cross elasticity of demand} = \\frac{\\% \\Delta Q_1}{\\% \\Delta P_2}$$<\/p>\n
where $Q_1$ is the quantity demanded of good 1, $P_2$ is the price of good 2, and $\\% \\Delta Q_1$ and $\\% \\Delta P_2$ are the percentage changes in $Q_1$ and $P_2$, respectively.<\/p>\n
In this case, the price of tea increases by 25% (from Rs. 40 to Rs. 50), and the demand for coffee increases by 20% (from 500 pounds to 600 pounds). Therefore, the cross elasticity of demand is:<\/p>\n
$$\\text{Cross elasticity of demand} = \\frac{20\\%}{25\\%} = \\frac{2}{3}$$<\/p>\n
This means that a 1% increase in the price of tea will lead to a 0.67% increase in the demand for coffee.<\/p>\n
The cross elasticity of demand can be positive or negative. A positive cross elasticity of demand indicates that the two goods are substitutes. This means that if the price of one good increases, the demand for the other good will increase. A negative cross elasticity of demand indicates that the two goods are complements. This means that if the price of one good increases, the demand for the other good will decrease.<\/p>\n
In this case, tea and coffee are substitutes. This is because they are both beverages that people can consume to quench their thirst. When the price of tea increases, people will switch to coffee, which is a cheaper alternative. This is why the cross elasticity of demand is positive.<\/p>\n","protected":false},"excerpt":{"rendered":"
[amp_mcq option1=”$$\\frac{1}{2}$$” option2=”$$\\frac{2}{3}$$” option3=”$$\\frac{3}{4}$$” option4=”$$\\frac{4}{5}$$” correct=”option1″]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[12],"tags":[],"class_list":["post-58426","post","type-post","status-publish","format-standard","hentry","category-economics","no-featured-image-padding"],"yoast_head":"\n