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Chapter 5: Q.32 (page 131)

Suppose you could buy shoes one at a time, rather than in pairs. What do you predict the cross-price elasticity for left shoes and right shoes would be?

Short Answer

Expert verified

Each shoe's cross-price elasticity is negative.

Step by step solution

01

Definition

Cross price elasticity of supply:

The cross-price elasticity of demand is the proportion of a change in the quantity requested for one commodity to a change in price for another. For complimentary items, it's a negative.

02

Explanation

In this case, the left and right shoes will compliment each other. As a result, a rise in the price of the left shoe will lead to a decrease in the quantity demanded of the right shoe, resulting in a negative cross-price elasticity.

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Suppose you are in charge of sales at a pharmaceutical company, and your firm has a new drug that causes bald men to grow hair. Assume that the company wants to earn as much revenue as possible from this drug. If the elasticity of demand for your company鈥檚 product at the current price is 1.4, would you advise the company to raise the price, lower the price, or keep the price the same? What if the elasticity were 0.6? What if it were 1? Explain your answer.

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