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Question
Macroeconomics
Posted 3 months ago

An economist calculated the cross-price elasticity of demand for nicknacks and gizmos and got -0.5 .

What can she conclude about the relationship between these two goods based on this elasticity?

Choose 1 answer:
(A) they are necessities
(B) they are complements
(C) they are substitutes
(D) they are unrelated goods
(E) they are normal goods
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Answer from Sia
Posted 3 months ago
Solution
a
Cross-Price Elasticity of Demand: The cross-price elasticity of demand measures the responsiveness of the quantity demanded for one good to a change in the price of another good. It is calculated using the formula: Exy=% change in quantity demanded of good x% change in price of good yE_{xy} = \frac{\% \text{ change in quantity demanded of good } x}{\% \text{ change in price of good } y}
b
Interpretation of the Coefficient: A negative cross-price elasticity of demand indicates that the two goods are complements, meaning that an increase in the price of one good leads to a decrease in the quantity demanded of the other good
c
Conclusion Based on the Coefficient: Since the economist calculated the cross-price elasticity of demand for nicknacks and gizmos as -0.5, this suggests that the two goods are complements
Answer
(B) they are complements
Key Concept
Cross-Price Elasticity of Demand for Complements
Explanation
A negative cross-price elasticity of demand indicates that the goods in question are complements, as the demand for one decreases when the price of the other increases.

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