Question

Suppose that the cross price elasticity of demand between good X and good Y is minus−1.55. This indicates that the two goods are

Answer 1

Complementary goods

Step-by-step explanation:

Cross price elasticity of demand between two goods, X and Y

=
`(Percentage Change in Demand of X)/(Percentage Change in Price of Y)`

For the cross price elasticity to be negative at -1.55, it means

• the higher the price of Y (which will naturally translate to a lower demand for Y), the less the quantity of X that is demanded, and
• the lower the price of Y (translating to a higher demand for Y), the less the quantity of X that is demanded.

Thus, demand for both X and Y move in the same direction meaning they are complementary goods and are used together.