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Question
Microeconomics
Posted 7 months ago
The price elasticity of demand for smokegrinders in response to changes in the price of purpletts is -2 .
Which of the following is the best explanation of how we know that these are complements based on this elasticity?
Choose 1 answer:
(A) The value of elasticity indicates people buy fewer purpletts when the price of purpletts increases.
(B) The value of the cross-price is negative
(C) This elasticity indicates that people consume more purpletts and fewer smokegrinders when the price of smokegrinders increase
(D) The value of the cross-price elasticity is not 0
(E) This elasticity indicates that the quantity demanded of purpletts decreases when the price of purpletts decreases .
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Answer from Sia
Posted 7 months ago
Solution
a
Cross-Price Elasticity: The cross-price elasticity of demand measures the responsiveness of the quantity demanded for one good when the price of another good changes
b
Negative Elasticity: A negative cross-price elasticity indicates that the two goods are complements. This means that an increase in the price of one good leads to a decrease in the quantity demanded of the other good
c
Given Elasticity: The given elasticity value of -2 for smokegrinders in response to changes in the price of purpletts indicates that these two goods are complements
d
Correct Answer: The best explanation is that the value of the cross-price elasticity is negative
Answer
(B) The value of the cross-price is negative
Key Concept
Cross-Price Elasticity of Demand
Explanation
The cross-price elasticity of demand is used to determine whether two goods are complements or substitutes. A negative cross-price elasticity indicates that the 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.
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