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7 May, 08:37

Maddy purchases 2 pounds of beans and 3 pounds of rice per month when the price of beans is S2 per pound. She purchases 1 pounds of beans and 4 pounds of rice per month when the price of beans is $3 per pound. Maddy's cross - price elasticity of demand for beans and rice is A. - 0.71, and they are complements B. 0.71, and they are substitutes. C. 1.4, and they are substitutes D. - 1.4, and they are complements

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  1. 7 May, 08:39
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    B. 0.71, and they are substitutes

    Explanation:

    The computation of the cross - price elasticity of demand is shown below:

    = (change in quantity demanded : average of quantity demanded) : (percentage change in price : average of price)

    where,

    Change in quantity demanded is

    = Q2 - Q1

    = 4 - 3

    = 1

    And, average of quantity demanded is

    = (4 + 3) : 2

    = 3.5 0.2857

    Change in price is

    = P2 - P1

    = $3 - $2

    = $1

    And, average of price is

    = ($3 + $2) : 2

    = 2.5

    So, after solving this, the cross price elasticity of demand is + 0.7 and it refers to the substitutes goods
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