Answer to Question #266013 in Management for Riya

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 are substitute goods since they have a positive cross-price elasticity of demand.

(b) If the price of one of the two goods increases by 5 per cent, it will be substi­tuted by the other good so that the quantity demanded of this other good will increase. With positive cross-price elasticity being equal to 1.2, the quantity demanded of the other good will increase by 1.2\*5\%=6\%1.2×5%=6%