ravianlee

TW Cafe sells both coffee and Good Z.The price of coffee is $30 and Good Z is $40. 200 units of coffee are sold. Sheis facing the following demand for coffee that she sells:

Q = 120 – 18P + 2I - 6PZ

where  Q = units of coffee
            P = price of coffee
            I = income level
            PZ = price of Good Z

a.
What is the price elasticity of demand forcoffee?  
b.
What is the cross-price elasticity of demand forcoffee? Interpret the value.

williamEX

Price elasticity of demand: = (dQ / dP)*(P/Q)
= |-18| * 30/200
=2.7

Cross Price elasticity of demand: = (dQ / dPZ)*(PZ/Q)
= -6 * 40/200
= -1.2

A negative cross elasticity of demand means coffee and good z are complement of each other
As the price of good Z rises, the demand for coffee falls