ECONOMICS
ELASTICITY OF DEMAND
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Question
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The cross-elasticity of demand of good S with respect to the price of good P is +1.5.The cross-elasticity of demand of good S with respect to the price of good R is-1.5.The cross-elasticity of demand of good P with respect to the price of good R is-1.5.What can be concluded about goods P, R and S?
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S and P are complements; P and R are substitutes.
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S and P are complements; R is an inferior good.
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S and P are substitutes; P and R are complements.
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S and P are substitutes; R is an inferior good.
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Explanation:
Detailed explanation-1: -Cross elasticity of demand refers to the way that changes in the price of one good can affect the quantity demanded of another good. This relationship can vary depending on whether the two goods are substitutes, complements, or unrelated to each other.
Detailed explanation-2: -In this question, the price elasticity is 0.8. This implies that for every one percent increase in price, the quantity demanded will decline by 0.8%.
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