ECONOMICS
ELASTICITY OF DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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the two goods are luxury goods.
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the two goods are complements.
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the two goods are substitutes.
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the two goods are normal goods.
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Detailed explanation-1: -Answer and Explanation: If the cross-price elasticity of demand between two commodities is positive, then these commodities are substitutes. In case the cross elasticity of demand for two goods is positive, that would mean that they are substitutes for each other.
Detailed explanation-2: -Examples of Cross-Price Elasticity Complementary goods: If the percentage change in the quantity of demanded salsa is-15%, and the percentage change in the price of chips is 10%, the cross-price elasticity coefficient is-1.5.
Detailed explanation-3: -If two goods are substitutes, an increase in the price of one will lead to an increase in the demand for the other – the cross price elasticity of demand is positive.
Detailed explanation-4: -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. Alternatively, the cross elasticity of demand for complementary goods is negative.
Detailed explanation-5: -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.