Always Round Tire finds the following cross elasticity:(a) Demand for tires/price of batteries = 0.45.(b) Demand for tires/price of brake jobs = ?0.70.(c) Demand for tires/price of an oil change = 0.002.Discuss how the pricing of batteries, brakes, and oil changes will affect the sales of tires.
What will be an ideal response?
The positive cross-price elasticity for tires with respect to the price of batteries (0.45) shows that batteries are a substitute for tires. When the price of batteries increases 10 percent, the quantity of tires sold increases 4.5 percent.
The strong negative cross-price elasticity for tires with respect to the price of brake jobs (-0.70) shows that brake jobs are complementary goods for tires. When the price of brake jobs increases 10 percent, the quantity of tires sold decreases 7 percent.
The nearly zero cross-price elasticity for tires with respect to the price of an oil change (0.002) shows that the price of oil change has almost no effect on tire sales. Oil changes are neither substitutes nor complements for tires.
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