Cross Elasticity of Demand: What Does It Mean?
What does a cross elasticity of demand of $1.10 between cantaloupes and watermelons indicate?
A) People like cantaloupes 10% more than watermelons.
B) People like watermelons 110% more than cantaloupes.
C) A 10% increase in the price of cantaloupes will decrease the quantity demanded of watermelons by 11%.
D) A $1 increase in the cost of either product will decrease the quantity purchased by 110 units per day.
E) A 10% increase in the price of cantaloupes will increase the quantity demanded of watermelons by 11%.
Answer:
The correct interpretation of a cross elasticity of demand of $1.10 between cantaloupes and watermelons is option C) A 10% increase in the price of cantaloupes will decrease the quantity demanded of watermelons by 11%.
When the cross elasticity of demand between two goods is positive, it indicates that the goods are substitutes for each other. In this case, a cross elasticity of $1.10 means that there is a strong positive relationship between the prices of cantaloupes and the quantity demanded of watermelons. If the price of cantaloupes were to increase by 10%, the quantity demanded of watermelons would decrease by 11%.
This information is crucial for Jeffery Brooks as the produce manager, as it helps him understand how changes in the price of cantaloupes can impact the sales of watermelons in the store. By considering the cross elasticity of demand, he can make informed decisions about pricing and stocking these products to maximize profit and customer satisfaction.