Cross Elasticity of Demand Calculation

To calculate the cross elasticity of Hero against the Price of Royal, we need to use the following formula:

Cross Elasticity of Demand = Percentage Change in Quantity Demanded of Hero / Percentage Change in Price of Royal

Given that the price of Royal increases by 10%, the demand for Hero increases by 15%. Therefore, we can calculate the percentage change in quantity demanded of Hero as:

Percentage Change in Quantity Demanded of Hero = 15%

Similarly, the percentage change in price of Royal is:

Percentage Change in Price of Royal = 10%

Now, we can plug these values into the formula to get:

Cross Elasticity of Demand = 15% / 10% = 1.5

Therefore, the cross elasticity of Hero against the Price of Royal is 1.5.

Explanation

In this question, we are given that a dealer sells two brands of motorcycles - Royal and Hero. When the price of Royal increases by 10%, the demand for Hero increases by 15%. This is an example of cross elasticity of demand, which measures the responsiveness of demand for one product to a change in the price of another product.

In this case, since the price of Royal is increasing, we would expect consumers to look for substitutes, such as Hero motorcycles. The fact that the demand for Hero increases by 15% when the price of Royal increases by 10% suggests that Hero is indeed a substitute for Royal.

To calculate the cross elasticity of demand, we use the formula mentioned above. In this case, we divide the percentage change in quantity demanded of Hero by the percentage change in price of Royal. The result is a measure of how sensitive the demand for Hero is to changes in the price of Royal.

The answer we get is 1.5, which means that the demand for Hero is relatively elastic with respect to the price of Royal. This means that consumers are quite responsive to changes in the price of Royal and are willing to switch to Hero if the price of Royal increases.

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