4 What does the cross elasticity of demand measure?

The change in the quantity demanded is the opposite of what we’ve just calculated (again as percentages of the average quantity and average price): the quantity of smoothies demanded decreases by 20 per cent (-20%).
The change in the price of a salad, a complement of smoothie, is the same as the percentage change in the price of a coffee that we’ve just calculated: the price of a salad rises by 50 per cent (+50%). So the cross elasticity of demand for smoothies with respect to the price of a salad is:

Because smoothies and salads are complements, when the price of a salad rises, the demand for smoothies decreases. The demand curve for smoothies shifts leftward from D0 to D2. Because a rise in the price of a salad brings an decrease in the demand for smoothies, the cross elasticity of demand for smoothies with respect to the price of a salad is negative. The price and quantity change in opposite directions.

Transcribed Image Text:

-20% +50% -0.4