Answer to Question #319778 in Microeconomics for Mponi

Question

With reference to the cross price elastic od demand , classify the following values and explain type of product by providing an example

Ec = -0.5

Ec =2.1

Answer 1

Answers

Ec = -0.5

This cross elasticity of demand represents that of complementary goods. As the price for one item rises, an item used together with that item and required for its consumption decreases because the demand for the main good has also decreased.

Ec =2.1

This is for the close substitutes

The cross elasticity of demand for substitute goods is always positive because the demand for one good increases when the price for the substitute good increases. For example, if the price of coffee increases, the quantity demanded for tea (a substitute beverage) increases as consumers switch to a less expensive yet substitutable alternative