Suppose nationwide increases the insurance premium they charge for their auto policies by 18 percent. in response, the demand for state farm auto policies in a small town increases from 6,000 to 7,500. what is the cross-price elasticity of demand for state farm auto policies in this town?

a. using the midpoint formula, the cross-price elasticity of demand for state farm auto policies is:
b. in this instance, auto insurance from nationwide and auto insurance from state farm are

Solution:

Cross-price elasticity of demand is given

Ec = (% Change in Quantity Demanded of good / % Change in Price of good)

A Greek letter "DELTA," which indicates the symbol Delta, suggests the change in the price and quantity demanded from the basic quantify or price.

% Change in Quantity Demanded in units = [ (6,900 - 6,000) / 6,000] * 100

                                                                        = (900 / 6,000) * 100                                                      

                                                                        = 15%

% Change in Price = [ (1.08x- x) / x] * 100

                                = (0.08 / 1) * 100

                                = 8%

Price has been denoted as x and 1.08x respectively, as no indication is available on what the actual price was; only information of how much it increased by is available to us.

Cross-Price Elasticity of Demand (Ec) equals (15% / 8%) = 1.875

Therefore, the cross-price elasticity of demand of State Farm Auto Policies is 1.875

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