The price of one kg of tea is ₹30. At this price ₹5 kg of tea is demanded. If the price of coffee rises…
Cross price elasticity of demand between tea (X) and coffee (Y) is given by Ec = (Delta Qx / Delta Py) * (Py / Qx). When the price of coffee rises from Rs. 25 to Rs. 35…
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The price of one kg of tea is ₹30. At this price ₹5 kg of tea is demanded. If the price of coffee rises from ₹25 to ₹35 per kg, the quantity demanded of tea rises from 5 kg to 8 kg. Find the cross price elasticity of tea.
Answer and explanation
Correct answer C
Cross price elasticity of demand between tea (X) and coffee (Y) is given by Ec = (Delta Qx / Delta Py) * (Py / Qx). When the price of coffee rises from Rs. 25 to Rs. 35 (Delta Py = 10), the demand for tea increases from 5 kg to 8 kg (Delta Qx = 3), giving Ec = (3 / 10) * (25 / 5) = (+) 1.5, which confirms that tea and coffee are substitute goods.
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UGC NET Commerce