Chapter 48, Problem 2CYU

To determine

To classify: Butter and margarine are substitutes or complements for the manufacturer.

Explanation of Solution

  $\begin{array}{c}\text{Cross price elasticity of demand = }\frac{\text{percentage Change in quantity of butter }}{\text{perecentage change in price of margarine}}\\ \text{= }\frac{5}{20}\\ \text{= 0}\text{.25}\end{array}$

The cross-price elasticity of demand is 0.25 which means the elasticity is positive and therefore, goods are substituted. This happens because when the price of margarine went up, the quantity demanded of the butter also went up.

Economics Concept Introduction

Introduction: Cross-price elasticity of demand shows how the price of one commodity affects the demand of another.