Answer to Question #279629 in Microeconomics for Tasneem

Question

Suppose the price of the good is 5, and that is increases by 5\% . As a consequence, the demand of another good decreases by 20 * o/o . Calculate the cross-price elasticity for the other good. Is the other good a substitute good or a complementary good to the first one?

Answer 1

Solution:

Cross-Price Elasticity of Demand = percent change in quantity of good X demanded $\div$ percent change in price of Y

Cross-Price Elasticity of Demand = $\frac{-20\%}{5\%} = -4$

The cross elasticity of demand is less than 0, therefore, the other good is a complementary to the first one.