CMA Foundation · Fundamentals of Business Economics and Management · Theory of Demand and Supply
Cross elasticity of demand between two goods, X and Y, is found to be -1.8. This indicates that X and Y are:
X and Y are complements. A negative cross elasticity of -1.8 means that when the price of one good rises, the quantity demanded of the other falls. This inverse relationship is characteristic of goods used together, whereas substitutes show a positive value.
- ASubstitutes with a strong response
- BComplementsCorrect
- CUnrelated goods
- DBoth inferior goods
Explanation
Cross elasticity is the percentage change in quantity of X divided by the percentage change in price of Y. A negative sign means a rise in the price of Y reduces demand for X, which is the behaviour of complementary goods. Substitutes have positive cross elasticity, and unrelated goods have a value near zero.
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