Answer to Question #269567 in Economics for manasi

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) If a cross-price elasticity of demand is positive, then these goods are substitutes.

(b) If the price of one of the goods rises by 5 percent, then the demand for the other good will rise by 5×1.2 = 6 percent.