Please make a graph of the following in MICROSOFT EXCEL to explain THE FULL answ
ID: 1196564 • Letter: P
Question
Please make a graph of the following in MICROSOFT EXCEL to explain THE FULL answer of the following.
Suppose the quantity of gadgets demanded is reported to have fallen by 20 units—from 50 to 30 units—as a result of a per-unit-price increase in widgets from $10 to $14, what is the cross-price elasticity of demand? Explain your cross-price elasticity coefficient and graphically show and explain the consumer responses in both markets. As a manager, carefully explain why your estimated coefficient may or may not influence your pricing decision in this case.
Explanation / Answer
Solution:
Cross Price Elasticity (Ec) = %change in quantity demanded of good A
%change in price of good B
Or
Price of Widgets
(Good Y)
Quantity of Gadgets(Good X)
$10
50
$14
30
From the above chart:
Price(OLD)=10
Price(NEW)=14
QDemand(OLD)=50
QDemand(NEW)=30
To calculate the cross-price elasticity, we need to calculate the percentage change in quantity demanded and the percentage change in price.
We'll calculate these one at a time.
Calculating the Percentage Change in Quantity Demanded of Good X
The formula used to calculate the percentage change in quantity demanded is:
[QDemand(NEW) - QDemand(OLD)] / QDemand(OLD)
By filling in the values we wrote down, we get:
[30 - 50] / 50 = (-) 20/50 = (-)0.4
So we note that % Change in Quantity Demanded = -0.4 (This in decimal terms. In percentage terms this would decline by 40%).
Calculating the Percentage Change in Price of Good Y
The formula used to calculate the percentage change in price is:
[Price(NEW) - Price(OLD)] / Price(OLD)
We fill in the values and get:
[14-10]/10=0.4
We have our percentage changes, so we can complete the final step of calculating the cross-price elasticity of demand.
Final Step of Calculating the Cross-Price Elasticity of Demand
We go back to our formula of:
CPEoD = (% Change in Quantity Demanded of Good X)/(% Change in Price of Good Y)
We can now get this value by using the figures we calculated earlier.
Ec= (-)40 %/ 40%= (-)1
We conclude that the cross-price elasticity of demand for X when the price of Y increases from $10 to $ 14 is (-) 1.
The cross-price elasticity of demand is used to see how sensitive the demand for a good is to a price change of another good. A high positive cross-price elasticity tells us that if the price of one good goes up, the demand for the other good goes up as well (Substitute). A negative tells us just the opposite, that an increase in the price of one good causes a drop in the demand for the other good (Complements). A small value (either negative or positive) tells us that there is little relation between the two goods.
In this particular case, we calculated the cross-price elasticity of demand to be (-)1, so our two goods are complements when the price of good Y is rises from$10 to $14.
Since the value is small the estimated coefficient may not influence the pricing decision.
Price of Widgets
(Good Y)
Quantity of Gadgets(Good X)
$10
50
$14
30