Question

Define elasticity of demand. As the price of good X rises from $10 to $12, the quantity demanded

of good Y rises from 110 units to 116 units. Are X and Y substitutes or complements? What is the

cross elasticity of demand?

Answer 1

Elasticity of demand

This is the percentage change of quantity of good or service demanded with respect or in response to the change in price.

Goods X and Y are substitutes. For example coffee and tea.

C. elasticity=$\frac{\Delta Qy}{\Delta Py}$

= $\frac{116-110}{12-10} = 3$

Elasticity of demand > 0 (3)

This confirms that goods X and Y are substitutes.