If the demand for butter rises by 4% while the price of margarine rises by 8%, then calculate the cross price elasticity of demand of butter with respect to the price of margarine?
The formula for the cross-price elasticity is (%change in Qa)/(%change in Pb) Where Qa is the quantity demanded of good a, and Pb is the price of good b. Apply this formula. You have all the information you need.
To calculate the cross-price elasticity of demand of butter with respect to the price of margarine, you need to determine the percentage change in the quantity demanded of butter and the percentage change in the price of margarine.
Let's assume that the initial quantity demanded of butter is Qa1 and the initial price of margarine is Pb1. After the changes, the new quantity demanded of butter is Qa2, and the new price of margarine is Pb2.
The percentage change in Qa is calculated as ((Qa2 - Qa1) / Qa1) * 100.
The percentage change in Pb is calculated as ((Pb2 - Pb1) / Pb1) * 100.
Using the given information that the demand for butter rises by 4% and the price of margarine rises by 8%, we can substitute these values into the formulas.
%change in Qa = 4%
%change in Pb = 8%
Therefore, the cross-price elasticity of demand of butter with respect to the price of margarine is (4% / 8%) = 0.5.