Suppose Nationwide increases the insurance premium they charge for their auto policies by 16 percent. In response, the demand for State Farm auto policies in a small town increases from 3 comma 500 to 4 comma 025. What is the cross-price elasticity of demand for State Farm auto policies in this town?

CPE = 15%/16% = 0,9375

Explanation:

The cross-price elasticity measures how the quantity demanded of good A changes when the price of good B changes by 1%.

The cross-price elasticity (CPE) formula is:

CPE = Δ%q of good A / Δ%p of good B

good A: state farm auto policies

good B: insurance premium for auto policies

- Percentage change in the quantity demanded for good A:

%Change in quantity demanded = (q2-q1/q1) * 100 = (4,025-3,500) / 3,500 = 0,15*100 = 15%

- Percentage change in the price for good B: 16%

-CPE = 15%/16% = 0,9375