In the spring of 2002,lettuce price doubled from about $1.5 to $3 per head. The
ID: 1191011 • Letter: I
Question
In the spring of 2002,lettuce price doubled from about $1.5 to $3 per head. The reaction of one consumers was quoted in newspaper article; "I will not buy lettuce when it is a $3 a head"she said,adding that other green vegetable can fill in for lettuce."if bread were a loaf we'd still buy it. But lettuce is not that important in our familly".
For a consumer's household , which product has higher rrice elastticity of demand,bread or lettuce,explain?
Is the cross-price elasticity of demand between lettuce and other green vegetables positive or negative,why?
Explanation / Answer
Assuming that the reaction of this consumer respresents the entire society, we can conclude that the price elasticity of demand is more for lettuce, that is, lettuce is more price elastic. When the price of lettuce doubled from $1.5 to $3, the demand for lettuce will have a sharp decline and consumers would move towards its close substitutes. On the otherhand, price elasticity of demand for bread is inelastic. By saying "if bread were a loaf we'd still buy it" implies that even if the price of bread increases, the demand would fall only marginally.
The cross price elasticity of demand between lettuce and other green vegetables would be positive. Here the society views lettuce and other green vegetables to be substitutes. When the price of lettuce increases, the demand for the same would fall and the demand for green vegetables would increase, making the elasticity positive.