CA Foundation · Business Economics · Theory of Demand and Supply
The cross elasticity of demand for tea with respect to the price of coffee is +0.6, and that of tea with respect to the price of sugar is −0.4. If the price of coffee rises 10% and the price of sugar rises 20% at the same time, what is the net percentage change in the quantity demanded of tea, other factors constant?
Tea demand falls by 2%. The substitute effect from coffee adds 0.6 × 10 = 6%, while the complement effect from sugar subtracts 0.4 × 20 = 8%. The net change is 6 − 8 = −2%, so the complement's larger effect outweighs the substitute's.
- A+2%
- B−2%Correct
- C+14%
- D−8%
Explanation
Effect of coffee: 0.6 × 10 = +6%. Effect of sugar: −0.4 × 20 = −8%. Net change = +6 − 8 = −2%. Adding the absolute values gives 14%, which ignores the negative sign for the complement, and −8% ignores the coffee effect.
Did you get it right without looking?
One question tells you little. A timed set on Theory of Demand and Supply shows your real accuracy, how long you take and where you lose marks.
More Theory of Demand and Supply questions
- A supply schedule is linear: at ₹20 per unit, 100 units are supplied, and at ₹30 per unit, 140 units are supplied. Using the midpoint approa…
- A steel manufacturer in Jamshedpur adopts a new technology that lowers its cost of production per tonne. Other things remaining the same, wh…
- When the price of coffee increases, the demand for tea rises in the Indian market. This relationship between coffee and tea illustrates whic…
- Which of the following is most likely to cause a rightward shift of the supply curve of cotton shirts produced by a Tirupur garment manufact…
- In Indian cities, the price of petrol rises and, as a result, the number of litres bought per month by a household falls, while its income, …
- A consumer's demand for premium coffee increases when the price of tea falls. Which of the following best describes the relationship between…