Question

You are told that the cross-price elasticity between goods X and Y is +2.0. This means that:

a) Goods X and Y are perfect substitutes
b) Goods X and Y are substitutes
c) Goods X and Y are complements
d) There is no relationship between goods X and Y

Answer 1

Cross-price elasticity of +2.0 between goods X and Y means they are substitutes, implying that a price increase in one leads to an increased demand for the other, indicating a positive relationship, not the absence of one.

Step-by-step explanation:

The student is inquiring about the concept of cross-price elasticity, which measures the responsiveness of the demand for one good to a change in the price of another good.

With a cross-price elasticity of +2.0 between goods X and Y, this indicates that X and Y are substitute goods. Essentially, a 1% increase in the price of good Y leads to a 2% increase in the quantity demanded of good X. It's important to note that if the goods were complements, the cross-price elasticity would have been negative.

So, contrary to the incorrect option (d), there is indeed a relationship between goods X and Y; they are substitutes. If one were to experience a price increase, it would lead to an increased demand for the other.