If a 25 percent decrease in the price of sapphires causes a 15 percent decrease in the quantity of diamonds demanded, then the cross-price elasticity of demand between sapphires and diamonds is:
To solve for the cross-price elasticity of demand: Take the quantity of the diamonds demanded and divide it by the decrease in the price of sapphires. Cross-price elasticity of demand = 15/25 Cross-price elasticity of demand = 0.6
When you are solving for the cross-price elasticity of demand, you are seeing the response to the demand of a item when price changes for another good.
