Morning abiyibameyi — let's get this done.
The question asks to calculate the cross elasticity of demand between commodity W and commodity X.
From the table, we have the following data points:
• Initial Price of W (PW1) = N20
• Initial Quantity Demanded of X (QX1) = 500 kg
• New Price of W (PW2) = N30
• New Quantity Demanded of X (QX2) = 300 kg
The formula for arc cross elasticity of demand (XEDX,W) is:
XEDX,W=(PW2+PW1)/2PW2−PW1(QX2+QX1)/2QX2−QX1
Step 1: Calculate the percentage change in quantity demanded of X.
Change in quantity demanded of X:
ΔQX=QX2−QX1=300kg−500kg=−200 kg
Average quantity demanded of X:
Average QX=2QX2+QX1=2300kg+500kg=2800kg=400 kg
Percentage change in quantity demanded of X:
%ΔQX=400kg−200kg=−0.5
Step 2: Calculate the percentage change in the price of W.
Change in price of W:
ΔPW=PW2−PW1=N30−N20=N10
Average price of W:
Average PW=2PW2+PW1=2N30+N20=2N50=N25
Percentage change in price of W:
%ΔPW=N25N10=0.4
Step 3: Calculate the cross elasticity of demand.
XEDX,W=%ΔPW%ΔQX=0.4−0.5
XEDX,W=−1.25
The cross elasticity of demand between W and X is −1.25. Since the value is negative, commodities W and X are complementary goods.
The cross elasticity of demand between W and X is −1.25.
What's next?