Question

If the cross elasticity of demand for good A with respect to good B is -0.87, then good A is?

1) A substitute for good B
2) A complement for good B
3) An inferior good
4) A normal good

Answer 1

With a cross-price elasticity of -0.87, good A is a complement to good B. A negative cross-price elasticity indicates that an increase in the price of one leads to a decrease in the demand for the other.

Step-by-step explanation:

The cross-price elasticity of demand measures the sensitivity of the quantity demanded of one good in response to a change in the price of another good. In this case, the cross elasticity of demand for good A with respect to good B is -0.87. This negative value indicates that goods A and B are complements. When the cross-price elasticity is negative, it means that if the price of good B goes up, the demand for good A will decrease, suggesting that they are consumed together. Since they are complements, when you use more of one, you tend to use more of the other, such as coffee and sugar.

Answer 2

If the cross elasticity of demand for good A with respect to good B is -0.87, then good A is (1) A substitute for good B.

Step-by-step explanation:

A cross elasticity of demand measures how the quantity demanded of one good responds to a change in the price of another good. If the cross elasticity is negative, as in the case of -0.87, it indicates an inverse relationship. This means that as the price of good B (the reference good) increases, the quantity demanded for good A decreases.

Therefore, good A is a substitute for good B. The negative value suggests that consumers tend to shift their demand from good A to good B (or vice versa) in response to price changes. This is typical of substitute goods where an increase in the price of one leads to an increase in demand for the other.

Option 1 is correct.