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4 August, 04:25

Suppose the cross-price elasticity of demand between peanut butter and jelly is - 2.50. This implies that a 20 percent increase in the price of peanut butter will cause the quantity of jelly purchased to

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  1. 4 August, 07:58
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    Decrease by 50 percent.

    Explanation:

    Given that,

    Cross-price elasticity of demand between peanut butter and jelly = - 2.50

    This means that peanut butter and jelly are complimentary goods.

    Increase in the price of peanut butter = 20 percent

    Therefore,

    Cross-price elasticity of demand = Percentage change in the quantity demanded of Jelly : Percentage change in the price of peanut butter

    -2.50 = Percentage change in the quantity demanded of Jelly : 20

    -2.50 * 20 = Percentage change in the quantity demanded of Jelly

    - 50% = Percentage change in the quantity demanded of Jelly

    This indicates that a 20% increase in the price of peanut butter will lead to reduce the quantity demanded of Jelly by 50%.
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