ECONOMICS
ELASTICITY OF DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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complements; ‑0.6.
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substitutes; 0.6.
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substitutes; ‑1.67.
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inferior; 1.67.
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Detailed explanation-1: -The cross-price elasticity formula is an equation for calculating the cross-price elasticity of demand (XED) of two separate products or services: Cross price elasticity (XED) = (% change in demand of product A) / (% change of price of product B), where products A and B are different offerings.
Detailed explanation-2: -A positive cross elasticity of demand means that the demand for good A will increase as the price of good B goes up. This means that goods A and B are good substitutes. so that if B gets more expensive, people are happy to switch to A. An example would be the price of milk.
Detailed explanation-3: -We determine whether goods are complements or substitutes based on cross price elasticity-if the cross price elasticity is positive the goods are substitutes, and if the cross price elasticity are negative the goods are complements.
Detailed explanation-4: -In case the two goods are substitutes for each other like tea and coffee, the cross price elasticity will be positive, i.e. if the price of coffee increases, the demand for tea increases.