Final answer:
A cross-price elasticity of -2.00 for hot dogs and mustard implies that they are complements. Therefore, a 20 percent increase in the price of hot dogs would result in a 40 percent decrease in the quantity of mustard demanded.
Step-by-step explanation:
The cross-price elasticity of demand between two goods indicates how the quantity demanded of one good responds to a price change of another good. The given cross-price elasticity of demand between hot dogs and mustard is -2.00, which implies that mustard is a complement to hot dogs. Therefore, a 20 percent increase in the price of hot dogs (the complement good) is expected to lead to a decrease in the quantity of mustard demanded.
By applying the cross-price elasticity formula, which is the percentage change in the quantity demanded of one product (mustard in this case) divided by the percentage change in the price of another product (hot dogs), we can determine the effect on mustard's demand. The formula is Percentage Change in Quantity Demanded of Mustard = Cross-Price Elasticity x Percentage Change in Price of Hot Dogs. Substituting the given numbers in the formula, we get:
Percentage Change in Quantity Demanded of Mustard = -2.00 x 20%
Percentage Change in Quantity Demanded of Mustard = -40%
Thus, a 20 percent increase in the price of hot dogs would cause the quantity of mustard purchased to decrease by 40 percent. The correct answer to the student's question is option 2) Decrease by 40 percent.