ACCA Applied Knowledge · Business and Technology · Microeconomic factors
The cross elasticity of demand between product X and product Y is measured as -1.8. What does this indicate about the relationship between X and Y?
X and Y are complements. A negative cross elasticity means that when the price of one good rises, demand for the other falls, as happens with goods consumed together. Substitutes would show a positive value and unrelated goods a value close to zero.
- AThey are substitutes
- BThey are complementsCorrect
- CThey are unrelated goods
- DThey are both inferior goods
Explanation
A negative cross elasticity means a price rise in one good reduces demand for the other, which is characteristic of complements. Substitutes show positive cross elasticity, and unrelated goods show a value near zero. Inferior goods relate to income elasticity, not cross elasticity.
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