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When the price of tea in a local café rises from Br. 10 to 15 per cup, the demand for coffee rises from 3000 cups to 5000 cups a day, despite no change in coffee prices.

A) Determine the cross-price elasticity.

B) Based on the result, what kind of relation exists between the two goods?

Answer :

A) The cross-price elasticity of demand is 1.3.

B) Based on the result, since the cross elasticity of demand against the price of tea is greater than 1, the cross elasticity of demand for coffee is elastic.

What is cross elasticity?

Cross elasticity refers to the percentage change in the demand quantity of a coffee, for example, due to the percentage change in the price of tea.

Data and Calculations:

Old price of tea = Br. 10 per cup

New price of tea = Br. 15 per cup

Change in price = Br. 5 (Increase)

Percentage change in price = 0.50

Old demand for coffee = 3,000 cups

New demand for coffee = 5,000 cups

Change in demand = 2,000 (Increase)

Percentage change in demand = 0.666

Cross elasticity = Change in Demand/Change in Price

= 1.3 (0.67/0.5)

Thus, the demand for coffee is elastic relative to the change in the price of tea.

Learn more about cross elasticity at https://brainly.com/question/15308590

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Rewritten by : Jeany

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