Question

The cross-price elasticity of demand measures the a. percentage change in the quantity demanded of one good in one location divided by the price of the same good in another location. b. absolute change in the quantity demanded of one good divided by the absolute change in the price of another good. c. percentage change in the price of one good divided by the percentage change in the quantity demanded of another good. d. percentage change in the quantity demanded of one good divided by the percentage change in the price of another good.

Answer 1

The cross-price elasticity of demand measures the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good. Substitute goods have positive cross-price elasticities, while complementary goods have negative cross-price elasticities.

Step-by-step explanation:

The cross-price elasticity of demand measures the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good.

For example, if the price of coffee increases by 10% and the quantity demanded of tea increases by 5%, the cross-price elasticity of demand between coffee and tea would be -0.5 (-5%/10%).

Substitute goods have positive cross-price elasticities of demand, while complementary goods have negative cross-price elasticities.

Answer 2

d. percentage change in the quantity demanded of one good divided by the percentage change in the price of another good.

Step-by-step explanation:

Price-demand elasticity measures the demand sensitivity of a good when a change in the price of another good occurs. For example, what happens to the demand for bread when the price of butter varies? This depends on the cross elasticity of demand since these goods tend to be complementary.

The price elasticity of cross demand between two goods is easily calculated by a formula where the numerator is the change in the quantity of a good and the denominator is the percentage change in the price of the complementary good.

If the calculation of elasticity is greater than 1, it means that the amount demanded for bread is sensitive (elastic) to the price of butter and tends to vary sharply. If the result is between 0 and 1, the demand is inelastic, that is, the amount of bread demanded will not change considerably when the price of butter varies. If the calculation is equal to 1, then the demand for bread varies perfectly with the price of butter.