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When The Cost of Dough

The document discusses the cross-wage elasticity of demand for bakers given a change in the cost of dough-making machines. It states that when the cost of dough-making machines fell by 10%, the demand for bakers fell by 15%. This means the cross-elasticity of demand is 1.5 (15%/10%), indicating bakers and dough-making machines are gross substitutes since the coefficient is greater than zero, meaning a decrease in the cost of one leads to a decrease in the demand for the other.

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289 views

When The Cost of Dough

The document discusses the cross-wage elasticity of demand for bakers given a change in the cost of dough-making machines. It states that when the cost of dough-making machines fell by 10%, the demand for bakers fell by 15%. This means the cross-elasticity of demand is 1.5 (15%/10%), indicating bakers and dough-making machines are gross substitutes since the coefficient is greater than zero, meaning a decrease in the cost of one leads to a decrease in the demand for the other.

Uploaded by

amirol93
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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3.

When the cost of dough-making machines fell by 10 percent, the demand for
bakers fell by 15 percent. What is the cross-wage elasticity of demand for
bakers? Are bakers and dough-making machines gross substitute or gross
complements?

Gross compliments (substitutes) are inputs in the production process for which the
substitution effect is less (greater) than the scale effect. Thus a decrease in the cost of one
leads to an increase (decrease) in the demand for the other. Cross elasticity of demand =
% change demanded for assistant bakers / % change in cost of doughmaking machines.
15% / 10% = 1.5. Since the coefficient is greater than zero, these are gross substitutes.

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