Cross Elasticity of Monthly Demand for Powdered Milk

Introduction
Cross elasticity of demand measures the responsiveness of the quantity demanded for a particular good when the price of another good changes. In this case, we will be determining the cross elasticity of monthly demand for powdered milk when the price of fresh milk increases from Rs 20 to Rs 30 per litre.

Cross Elasticity of Demand Formula
The formula for cross elasticity of demand is:

Cross Elasticity of Demand = % Change in Quantity Demanded of Good X / % Change in Price of Good Y

Calculation
Assuming that the quantity demanded of powdered milk changes from 200 to 250 units when the price of fresh milk increases from Rs 20 to Rs 30 per litre, the calculation is as follows:

% Change in Quantity Demanded of Powdered Milk = (250 - 200) / ((250 + 200)/2) x 100% = 25%

% Change in Price of Fresh Milk = (30 - 20) / ((30 + 20)/2) x 100% = 33.33%

Cross Elasticity of Demand = 25% / 33.33% = 0.75

Interpretation
The cross elasticity of demand for powdered milk is 0.75, which implies that powdered milk is relatively elastic to the price of fresh milk. This means that as the price of fresh milk increases, the demand for powdered milk also increases. In this scenario, consumers will substitute fresh milk with powdered milk as a cheaper alternative.

Conclusion
Therefore, it can be concluded that the cross elasticity of monthly demand for powdered milk is 0.75 when the price of fresh milk increases from Rs 20 to Rs 30 per litre.

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