Ance Philip (Admin Exe (MBA ) IPCC 2013) (80 Points)
12 June 2012
Tea and Coffee are perfect substitute of each other, given the price of Tea and Coffee being Rs. 100 and Rs. 200 per kg. a consumer is prepared to buy 3 kg. of each.
If the price of tea remains the same and the price of coffee rises to Rs. 400 per kg. the demand for tea goes to 6 kg and that of coffee falls to 1 kg. The elasticity of substitution between Tea and Coffee is
a) 1
b) 4
c) 5
d) 3
Ashok Kumar Sharma
(Student)
(319 Points)
Replied 12 June 2012
answer is (a)...Coz the increase in quantity of tea and increase in price of coffee both are increased by 100%.........sooo ultimately the answer is 1....i.e. it is the good is elastic
Tejaswi Kasturi
(student-cpt)
(427 Points)
Replied 12 June 2012
elasticity of substitution is different from cross elasticity of demand which is 1.
For the above example if the products are perfect substitutes, then the utility curve will be a straight line with formula 0.8x+1.2y = 6 the marginal rate of substitution for the two substittes is 0. as such the elasticity of substitution is infinte.
if you want to learn more about elasticity of substitution I recommend the following links
https://www.econ.ucsb.edu/~tedb/Courses/GraduateTheoryUCSB/elasticity%20of%20substitutionrevised.pdf
https://en.wikipedia.org/wiki/Elasticity_of_substitution
https://en.wikipedia.org/wiki/Marginal_rate_of_technical_substitution
https://en.wikipedia.org/wiki/Constant_elasticity_of_substitution
https://homepage.newschool.edu/~het/essays/product/elastic.htm
Tejaswi Kasturi
(student-cpt)
(427 Points)
Replied 12 June 2012
This presentation explains the elasticity of substitution very very well if any body is interested to learn
CAclubindia
