What can we determine about two goods based on the cross-price elasticity of demand?

Choose 1 answer:
(A) Whether they are normal goods or inferior goods
(B) Whether they are complements or substitutes
(c) How responsive buyers are to a change in the price of each good
(D) Whether total revenue increases when the price of a good increases
(E) How responsive sellers are to changes in the price of a good

Question

What can we determine about two goods based on the cross-price elasticity of demand?

Choose 1 answer:
(A) Whether they are normal goods or inferior goods
(B) Whether they are complements or substitutes
(c) How responsive buyers are to a change in the price of each good
(D) Whether total revenue increases when the price of a good increases
(E) How responsive sellers are to changes in the price of a good

Accepted Answer

∻Solution∻ ‖ a ⋮ Cross-Price Elasticity of Demand: The cross-price elasticity of demand measures the responsiveness of the quantity demanded for one good when the price of another good changes. It is calculated using the formula: $$ E_{xy} = \frac{\% \Delta Q_x}{\% \Delta P_y} $$ where $ E_{xy} $ is the cross-price elasticity of demand, $ \% \Delta Q_x $ is the percentage change in the quantity demanded of good X, and $ \% \Delta P_y $ is the percentage change in the price of good Y. ‖ ‖ b ⋮ Interpretation of Values: - If $ E_{xy} > 0 $, the goods are substitutes. This means that an increase in the price of good Y leads to an increase in the quantity demanded of good X. - If $ E_{xy} < 0 $, the goods are complements. This means that an increase in the price of good Y leads to a decrease in the quantity demanded of good X. - If $ E_{xy} = 0 $, the goods are unrelated. ‖ ‖ c ⋮ Application to the Question: Based on the cross-price elasticity of demand, we can determine whether two goods are complements or substitutes. This is directly related to option (B) in the question. ‖ ∻Answer∻ ⚹ (B) Whether they are complements or substitutes ⚹ ∻Key Concept∻ ⚹ Cross-Price Elasticity of Demand ⚹ ∻Explanation∻ ⚹ The cross-price elasticity of demand helps us understand the relationship between two goods by indicating whether they are complements or substitutes based on the sign of the elasticity value. ⚹◊What is the formula for calculating cross-price elasticity of demand in Microeconomics⍭ Generate me a similar question◊

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