When the price of Ford pickup trucks rises from $18,000 to $19,000, the quantity of Chevy trucks demanded increases from 112,000 to 144,000. What does the cross elasticity of demand between Ford and Chevy trucks equal?
What will be an ideal response?
In this case, the cross elasticity of demand = (percentage change in the quantity of Chevy trucks demanded) ÷ (percentage change in the price of a Ford truck). Use the midpoint method to calculate the percentages. Thus the percentage change in the quantity of Chevy trucks demanded =
(144,000 - 112,000 ) ÷ (128,000 ) = 25 percent and the percentage change in the price of a Ford truck is ($19,000 - $18,000 ) ÷ ($18,500 ) = 5.4 percent. Thus the cross elasticity of demand equals
(25 percent) ÷ (5.4 percent) = 4.625.
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