Question

suppose an 18 percent drop in the price of strawberries leads to a 24 percent increase in the quantity demanded of strawberries and a 12 percent decrease in the quantity demanded of plums.
a. what is the price elasticity of demand for strawberries, in absolute value?
instructions: enter your response rounded to two decimal places, omitting any minus sign.
b. at the current price level, the demand for strawberries is (click to select) because the price elasticity of demand for strawberries is (click to select).
c. what is the cross - price elasticity of demand between strawberries and plums?
instructions: enter your response rounded to two decimal places, using a minus sign to indicate a negative value if appropriate.
d. strawberries and plums are (click to select) because the cross - price elasticity of demand is (click to select).

Explanation:

Step1: Calculate price - elasticity of demand for strawberries

The formula for price - elasticity of demand ($E_d$) is $E_d=\frac{\%\text{ change in quantity demanded}}{\%\text{ change in price}}$. Given that $\% \Delta Q = 24\%$ and $\% \Delta P=- 18\%$. In absolute value, $|E_d|=\frac{24}{18}\approx1.33$.

Step2: Determine the nature of demand for strawberries

If $|E_d|> 1$, demand is elastic. Since $|E_d|\approx1.33>1$, the demand for strawberries is elastic.

Step3: Calculate cross - price elasticity of demand

The formula for cross - price elasticity of demand ($E_{xy}$) is $E_{xy}=\frac{\%\text{ change in quantity demanded of good }x}{\%\text{ change in price of good }y}$. Here, $\% \Delta Q_{plums}=-12\%$ and $\% \Delta P_{strawberries}=-18\%$. So, $E_{xy}=\frac{- 12}{-18}\approx0.67$.

Step4: Determine the relationship between strawberries and plums

If $E_{xy}>0$, the two goods are substitutes. Since $E_{xy}\approx0.67>0$, strawberries and plums are substitutes.

Answer:

a. 1.33
b. elastic; greater than 1
c. 0.67
d. substitutes; positive