Question

If Good Cincreases in price by 50% a pound, and this causes the quantity demanded for Good D to increase by 60%, what is the cross-price elasticity of the two goods? Round your answer to one decimal place. ______

What is the relationship between the two goods?
a.complements
b.no relationship
c.substitutes

Answer 1

The cross-price elasticity of demand for Good D in response to the price change of Good C is 1.2, indicating that these goods are substitutes since the elasticity is positive.

Step-by-step explanation:

The cross-price elasticity of demand measures the responsiveness of the quantity demanded for one good to a change in the price of another good. In this case, when the price of Good C increases by 50%, the quantity demanded for Good D increases by 60%. To calculate the cross-price elasticity, we use the formula:

Cross-price elasticity of demand = (% Change in Quantity Demanded of Good D) / (% Change in Price of Good C)

Plugging in the numbers:

Cross-price elasticity of demand = (60%) / (50%) = 1.2

Since the cross-price elasticity is positive and greater than 1, this suggests the two goods are substitutes. Therefore, as the price of Good C goes up, consumers turn to Good D, increasing its quantity demanded.