Upper A
4
percent increase in the price of digital apps reduces the amount of tablet devices demanded by 4
percent.
The cross price elasticity of demand is enter your response here
.
(Enter your response rounded to two decimal places and include a minus sign if necessary.)
Part 2
The cross price elasticity of demand indicates that tablet devices and digital apps are
▼
complements
substitutes
unrelated goods
.
The cross price elasticity of demand is -4.00.
The cross price elasticity of demand indicates that tablet devices and digital apps are complements.
To find the cross price elasticity of demand (XED), we need to use the given information about the percent increase in the price of digital apps and the corresponding decrease in the quantity demanded of tablet devices.
The formula for XED is:
XED = % change in quantity demanded of one good / % change in price of another good
In this case, the % change in quantity demanded of tablet devices is -4% (because it decreased by 4%) and the % change in price of digital apps is +4% (assuming the price increased by 4%).
Now we can substitute these values into the XED formula:
XED = -4% / +4% = -1
Therefore, the cross price elasticity of demand is -1.
For Part 2, to determine whether tablet devices and digital apps are complements, substitutes, or unrelated goods, we look at the sign of the cross price elasticity of demand.
Since the XED is -1 (negative), it indicates that tablet devices and digital apps are substitutes.
Substitutes means that when the price of digital apps increases, the demand for tablet devices decreases (as indicated by the negative sign in XED).
To calculate the cross price elasticity of demand, we can use the following formula:
Cross price elasticity of demand = (percent change in quantity demanded of one good) / (percent change in price of another good)
Given that there is a 4 percent increase in the price of digital apps, which leads to a 4 percent decrease in the quantity demanded of tablet devices, we can substitute these values into the formula:
Cross price elasticity of demand = (-4%) / (4%)
Simplifying this expression, we get:
Cross price elasticity of demand = -1
Rounded to two decimal places, the cross price elasticity of demand is -1.
Part 2:
Since the cross price elasticity of demand is -1, it indicates that tablet devices and digital apps are substitutes.