Final answer:
A cross-price elasticity of demand of 1.25 indicates that a 10% decrease in the price of one good would lead to a 12.5% increase in the quantity demanded of good B.
Step-by-step explanation:
A cross-price elasticity of demand of 1.25 means that for a 10% decrease in the price of one good, the quantity demanded of another good, good B, will increase by 12.5%. Cross-price elasticity measures the responsiveness of the quantity demanded for a good to a change in the price of another good. Here, it's assumed that the two goods are substitutes since the cross-price elasticity is positive.
To calculate the percentage change in quantity demanded, you would use the formula: percentage change in quantity demanded of good B = cross-price elasticity of demand × percentage change in price of good A. Plugging in the values, we get 1.25 × (-10%) = -12.5%. Therefore, if the price of good A decreases by 10%, the quantity demanded of good B will increase by 12.5%.