The Impact of Cross-Price Elasticity on Consumer Behavior

How does cross-price elasticity affect the relationship between ketchup and hamburgers?

If the cross-price elasticity between ketchup and hamburgers is -1.2, what will happen if the price of ketchup increases by 4%?

Answer:

A 4% increase in the price of ketchup will lead to a 4.8% decrease in the quantity demanded of hamburgers.

Cross-price elasticity measures the sensitivity of the demand for one product to changes in the price of another product. In this case, a cross-price elasticity of -1.2 between ketchup and hamburgers indicates a strong negative relationship between the two items.

When the price of ketchup increases by 4%, the quantity of hamburgers demanded will decrease by 4.8%. This suggests that consumers view ketchup and hamburgers as complementary goods, meaning that an increase in the price of one will lead to a decrease in the demand for the other.

Understanding cross-price elasticity is essential for businesses to predict how changes in prices of related products can impact their sales and revenue. By analyzing these relationships, companies can make informed decisions about pricing strategies and product offerings to maximize their market share.