Suppose that the price elasticity of demand for cereal is -0.75 and the crossprice elasticity of demand between cereal and the price of milk is -0.9. if the price of milk rises by 10%, what would have to happen to the price of cereal to exactly offset the rise in the price of milk and leave the quantity of cereal demanded unchanged?

Price of cereals must fall by 12%

Explanation:

A 10% rise in the price of milk will lead to a fall in quantity demanded by =-0.9 * 10= 9%.  

To prevent the demand for cereals from falling by 9%, the price of cereals must fall by

Thus, to offset the effect of a 10% rise in price of milk, the price of cereals must fall by 12%.

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