Question

Suppose the price of video games falls from $40 to $20, and as a result, the quantity demanded of scooters falls from 40,000 to 10,000 per year. The value of the cross-price elasticity of demand is:

A) -2
B) -1
C) 1
D) 2

Answer 1

The cross-price elasticity of demand measures how the quantity demanded of one good changes when the price of another good changes. In this case, the cross-price elasticity of demand is -2, indicating that video games and scooters are substitute goods.

Step-by-step explanation:

The cross-price elasticity of demand measures how the quantity demanded of one good changes when the price of another good changes. It is calculated by dividing the percentage change in quantity demanded by the percentage change in price. In this case, the price of video games falls from $40 to $20, resulting in a decrease in the quantity demanded of scooters from 40,000 to 10,000 per year. The cross-price elasticity of demand is calculated as:

Cross-price elasticity of demand = (percentage change in quantity demanded of scooters) / (percentage change in price of video games)

Using the given values, the percentage change in quantity demanded is -75% ([(10,000 - 40,000) / 40,000] x 100) and the percentage change in price is -50% ([(20 - 40) / 40] x 100). Therefore, the cross-price elasticity of demand is -75% / -50% = 1.5. Since the value is positive, we can conclude that video games and scooters are substitute goods. Therefore, the correct answer is A) -2.