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Suppose that the cross-price elasticity of demand for

good X is 2.5. The price of good Y increases by 25%. What is the relationship between good X and good Y?

User Expz
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1 Answer

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Final answer:

Good X and good Y are substitute goods because the cross-price elasticity of demand is positive, indicating that an increase in the price of good Y leads to an increase in the demand for good X.

Step-by-step explanation:

The relationship between good X and good Y can be determined by looking at the cross-price elasticity of demand. In this case, the cross-price elasticity of demand for good X is 2.5, which suggests a positive relationship with good Y. Because the cross-price elasticity is positive and the price of good Y has increased by 25%, this indicates that good X and good Y are substitute goods. People will tend to purchase more of good X when the price of good Y goes up.

User Randy Olson
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