Answer to Question #262906 in Microeconomics for Nitin

Question

Two goods have a cross-price elasticity of demand of +1.2 (a) would you describe the

goods as substitutes or complements? (b) If the price of one of the goods rises by 5 per

cent, what will happen to the demand for the other good, holding other factors constant?

Answer 1

a) The goods can be described as substitutes because they have a cross-price elasticity of demand is +1.2. This is because any goods with positive price elasticity are considered as substitute goods.

b) When any one of the substitute's price is increased or rises by 5%, it will be substituted by other good the quantity demand of this other good will rise. The rise or increase in the quantity demand of this other good = 1.2* 5= 6%