Question

If the price elasticity of demand (PED) for good X is 0.5 and the PED for good Y is 1.2, while the cross-price elasticity of X and Y is negative, what type of goods and demands are being dealt with?

Answer 1

Good X has inelastic demand, good Y has elastic demand, and they are complements.

Step-by-step explanation:

The price elasticity of demand (PED) measures the responsiveness of quantity demanded to changes in price. A PED of 0.5 indicates an inelastic demand for good X, meaning that a percentage change in price will result in a less than proportional change in quantity demanded. This suggests that good X is a necessity or has limited substitutes.

The PED of 1.2 for good Y suggests that its demand is elastic. A percentage change in price will result in a more than proportional change in quantity demanded. This implies that good Y is a luxury or has many substitutes.

The negative cross-price elasticity of X and Y indicates that they are complements. A higher price for one good will lead to a decrease in the quantity demanded of the other good.