When the price of a gallon of orange juice rises from $1.50 to $2.00, the number of gallons of apple juice demanded rises from 20,000 to 30,000 per year
Use the midpoint formula to calculate the cross-price elasticity between orange juice and apple juice. What does the sign imply about the relationship between these two goods?
Percentage change in quantity of apple juice demanded = (30,000-20,000)/25,000
= 10,000/25,000 = 40 . Percentage change in the price of orange juice = ($2.00 - $1.50)/$1.75 = 0.50/1.75 = 28.6.
cross price elasticity = 40/28.6 = 1.4.
Because the cross-price elasticity is positive, this implies that the two goods are substitutes.
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