Kindly solve... (eco)

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Ance Philip

Admin Exe (MBA ) IPCC 2013

67 Points Posted on 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

Replies (3)

Ashok Kumar Sharma

Student

188 Points Posted on 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

358 Points Posted on 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