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How many products (goods or services) are considered when referring to the cross elasticity of demand formula?

User Megubyte
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Final answer:

The cross-price elasticity of demand formula considers two products, good A and good B, to measure the change in quantity demanded of one product due to a price change in the other. The relationship can either be between substitute goods (positive elasticity) or complement goods (negative elasticity).

Step-by-step explanation:

The cross-price elasticity of demand refers to measuring the sensitivity of the quantity demanded for one product in response to a price change of another product. When applying the formula for cross-price elasticity, it considers two products: good A and good B. Specifically, it is the percentage change in the quantity demanded of good A resulting from a percentage change in the price of good B. There are two types of relationships between products: substitutes and complements.

For substitute goods, such as coffee and tea, the cross-price elasticity of demand is positive; a price increase in good B (tea) would typically result in an increased quantity demanded of good A (coffee). On the other hand, for complement goods, like coffee and sugar, the cross-price elasticity of demand is negative; a price increase in one (sugar) would usually lead to a decreased quantity demanded of the other (coffee).

User Sujisha Os
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