Question

3.a. Two goods have a cross-price elasticity of demand of +1.2 (a) would you describe the
goods as substitutes or complements? (b) If the price of one of the goods rises by 5 per
cent, what will happen to the demand for the other good, holding other factors constant?

Answer 1

Explanation:

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Answer 2

Two goods have a cross-price elasticity of demand of +1.2, the goods can be described as substitute goods.

• the cross elasticity of the substitute goods tends to be positive as when the price of one good increases the price of the substitute goods also increase simultaneously

If the price of one of the goods rises by 5 per

cent and the cross elasticity is +1.2

• The cross elasticity =

℅ change Quantity/ % Change in price

So,

1.2 = ℅ change Quantity/ 5

℅ change Quantity = 1.2 × 5

= 6%

Thus, the demand for the other good, holding other factors constant will increase by 6%