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Question
Macroeconomics
Posted 3 months ago

The makers of a brand of potato chip know that the prices of other products might increase soon. The cross-price elasticity of potato chips and four other goods are given below.
\begin{tabular}{ll} 
Other good & Value of cross-price elasticity when the price of the other good changes \\
\hline Product W & -2 \\
Product XX & -0.5 \\
Product YY & 1 \\
Product ZZ & 3
\end{tabular}

Which product is the most complementary for chips?
Choose 1 answer:
(A) Product W
(B) Product XX
(c) Product YY
(D) Product ZZ
(E) Product YY or ZZ
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Answer from Sia
Posted 3 months ago
Solution
a
Understanding Cross-Price Elasticity: Cross-price elasticity of demand measures the responsiveness of the quantity demanded for a good to a change in the price of another good. It is calculated as the percentage change in the quantity demanded of one good divided by the percentage change in the price of the other good
b
Identifying Complements and Substitutes: If the cross-price elasticity of demand is negative, the two goods are complements; if it is positive, they are substitutes. The greater the absolute value of the negative cross-price elasticity, the stronger the complementary relationship
c
Analyzing the Given Data: Based on the provided cross-price elasticities, Product W has the highest absolute value of negative cross-price elasticity (-2), indicating that it is the most complementary to chips
Answer
Product W
Key Concept
Cross-Price Elasticity of Demand
Explanation
The product with the highest absolute value of negative cross-price elasticity is the most complementary to another product. In this case, Product W, with a cross-price elasticity of -2, is the most complementary to chips.

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