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18 April, 13:11

If Starbucks raises its price by 5 percent and McDonald's experiences a 0.5 percent increase in demand for its coffee, what is the cross-price elasticity of demand?

Instructions: Round your response to two decimal places. If you are entering a negative number be sure to include a negative sign (-) in front of that number.

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  1. 18 April, 16:11
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    Cross-price elasticity of demand = 0.1

    Explanation:

    We have the formula to calculate the cross-price elasticity of demand as below:

    Cross-price elasticity of demand = % change in quantity demanded for product X / % change in price of product Y

    Starbucks raises its price by 5 percent, so that percentage changes in price of Starbucks' products are 5

    McDonald's experiences a 0.5 percent increase in demand for its coffee, so that percentage changes in quantity demanded for McDonald's coffee is 0.5

    => Cross-price elasticity of demand = % changes in quantity demanded for McDonald's coffee / %changes in price of Starbucks' products

    = 0.5/5 = 0.1
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