Cross Elasticity of demand?

Question

x cost $3 and sells 400 units
y cost $10 and sells 200 units;
next year x still costs $3 but only sells 300 units while the price of y jumps to $12 and sells 150 units.

Can someone help me find the cross elasticity of demand?

Answer 1

Cross elasticity is the sensitivity of Qx to a change in Py. To calculate:

E = (Q2 - Q1) / (Q2 + Q1) x (P2 + P1) / (P2 - P1)

so elasticity of x with respect to y is

(300-400)/(300+400) x (12+10)/(12-10) = -1.57

Because it is negative, good x is a complement to good y. Think of good y here as steak and good x here as steak sauce.