Problem: The accompanying table lists the cross-price elasticities of demand for several goods, where the percent price change is measured for the first good of the pair, and the percent quantity change is measured for the second good.
1) Explain the sign of each of the cross-price elasticities. What does it imply about the relationship between the two goods in question?
2) Compare the absolute values of the cross-price elasticities and explain their magnitudes. For example, why is the cross-price elasticity of McDonald's and Burger King less than the cross-elasticity of butter and margarine?
3) Use the information in the table to calculate how a 5% increase in the price of Pepsi affects the quantity of Coke demanded.
4) Use the information in the table to calculate how a 10% decrease in the price of gasoline affects the quantity of SUVs demanded.
Good Cross-price elasticities of demand
Air-conditioning units and -0.34
kilowatts of electricity
Coke and Pepsi +0.63
High-fuel-consuming sport-utility vehicles
(SUV's) and gasoline -0.28
McDonald's burgers and Burger King burgers +0.82
Butter and margarine +1.54