Question

Cross elasticity of demand is defined as percentage change in:___________ a) quantity demanded of one product divided by the percentage change in the price of another product. b) the price of one product divided by the percentage change in quantity demanded of another product. c) the price of one product divided by the percentage change in quantity demanded of the same product. d) quantity demanded of one product divided by the percentage change in the price of the same product.

Answer 1

A) quantity demanded of one product divided by the percentage change in the price of another product.

Step-by-step explanation:

cross elasticity of demand = % change in quantity demanded for product A / % change in price of product B

When the cross elasticity of demand related products is negative, both products are complementary to each other, e.g. coffee and sugar, hot dogs and mustard. When the price of coffee increases, the quantity demanded for both coffee and sugar will decrease.

When the cross elasticity is positive, then both products are substitutes, e.g. coffee and tea, Coke and Pepsi. When the price of Pepsi increases, the quantity demanded of Coke increases while the quantity demanded of Pepsi decreases.

Answer 2

Answer: quantity demanded of one product divided by the percentage change in the price of another product

Step-by-step explanation:

The cross elasticity of demand shows how there will be changes in the quantity demanded of good A when there is an increase in the price of another good.

For q substitute good i.e a product that can be used in place of another product, the cross elasticity of demand is positive. This shows that when the price of good A increases, the quantity of good B increases. Examples of substitute are Coke and Pepsi.

When the cross elasticity if demand is negative, it shows that the goods are complements that is, the goods are used together. Example of complements are car and petrol. An increase in the price of car may lead to less cars being purchased which will also lead to less demand for fuel.