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Maddy purchases 2 pounds of beans and 3 pounds of rice per month when the price of beans is S2 per pound. She purchases 1 pounds of beans and 4 pounds of rice per month when the price of beans is $3 per pound. Maddy's cross- price elasticity of demand for beans and rice is A. -0.71, and they are complements B. 0.71, and they are substitutes. C. 1.4, and they are substitutes D. -1.4, and they are complements

Respuesta :

Answer:

B. 0.71, and they are substitutes

Explanation:

The computation of the cross- price elasticity of demand is shown below:

= (change in quantity demanded ÷ average of quantity demanded) ÷ (percentage change in price ÷ average of price)  

where,  

Change in quantity demanded is

= Q2 - Q1

= 4 - 3

= 1

And, average of quantity demanded is

= (4 + 3) ÷ 2

= 3.5   0.2857

Change in price is

= P2 - P1

= $3 - $2

= $1

And, average of price is

= ($3 + $2) ÷ 2

= 2.5

So, after solving this, the cross price elasticity of demand is +0.7 and it refers to the substitutes goods

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