Question:
An increase in the price of rice has caused the demand for bread to rise by 30%. The cross elasticity of demand between rice and bread is 3.0. Which change in the price of rice has brought this about?
(1) From Rs. 80 to Rs. 90
(2) From Rs. 60 to Rs. 72
(3) From Rs. 80 to Rs. 85
(4) From Rs. 70 to Rs. 80
(5) From Rs. 80 to Rs. 88
Correct Answer:
(5)
Answer Explanation:
Cross Elasticity of Demand (XED) = (% change in Qd of Bread) / (% change in Price of Rice). We know XED = 3.0 and % change in Qd = +30%. Therefore, $3.0 = 30% / x rightarrow x = 10%$. We need the option showing a 10% price increase. Option 5: $(88 – 80) / 80 = 8 / 80 = 0.10 = 10%$.
Topic: Elasticity Year: 2017
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