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Rising peanut prices have forced peanut butter makers to raise the price of a jar of peanut butter from $2 to $3 per jar, causing quantity demanded to fall. In addition, sales of jelly also dropped by 15%. Using the midpoint method, calculate the cross elasticity of demand between peanut butter and jelly.

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Answer:

37.5%

Explanation:

The percentage change in the price of a jar of peanut butter, using the midpoint method, is:

[tex]P_B = \frac{3-2}{\frac{3+2}{2}}*100=40\%[/tex]

The percentage change in sales of jelly is 15%.

The cross elasticity of demand between peanut butter and jelly is:

[tex]E = \frac{15\%}{40\%}*100\%\\E=37.5\%[/tex]

The cross elasticity of demand is 37.5%

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