Question:
Assume that the cross price elasticity of demand between rice and bread is 3.0. An increase in the price of rice causes the demand for bread to rise by 75%. Which change in rice prices has brought this about?
(1) From 50 to 70
(2) From 60 to 72
(3) From 75 to 90
(4) From 80 to 105
(5) From 100 to 125
Correct Answer:
(5)
Answer Explanation:
$XED = frac{% Delta Q_D text{ Bread}}{% Delta P text{ Rice}} rightarrow 3.0 = frac{75%}{% Delta P text{ Rice}} rightarrow % Delta P text{ Rice} = +25%$. Looking at the options, an increase from 100 to 125 represents exactly a 25% increase $left(frac{125 – 100}{100} times 100right)$.
Topic: Elasticity Year: 2022
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