Question

State the cross price elasticity (of demend). Suppose the price of a good (X) is RM5,

now the price of that good (X) increases by 5%. As a consequence, the demand of

another good (Y) decreases by 10%. What is the cross-price elasticity for the good

Y. Is the good (Y) is a substitue good or a complementary good to the first one?

Answer 1

i.) Price of good X =RM5

Price increases by 5% and Quantity decreases by 10%.

Cross price elasticity of demand=$$$\frac{\%\Delta\ QX}{\%\Delta Py}$

E_XY= $\frac{-10\%}{5 \%}$

=-2

=This negative CED indicates good X and Y are complements.

ii.) This is a complementary good because it has a negative cross-price elasticity, since the percentage change in price is positive, the percentage change in quantity will be negative and vice-versa.

As the price for one item increases, an item closely associated with that item and necessary for its consumption decreases because the demand for the main good has also dropped.