Question

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?
(5 Marks)

Answer 1

Answer:

a)the goods will be substitutes because a cross elasticity of demand measures the percentage chage of the quantity demanded of a good to the percentage change in the price of another.

b)If the price of one good rises then the quantity demanded for the other will increase and these are known as complementary goods .

Example, meat and fish

Answer 2

Correct Answer:

(a) Complementary goods

(b) Demand for other good will rise.

Explanation:

• Price elasticity of demand is the percentage change in the quantity demanded of a good or service divided by the change in the price.
• Cross elasticity of demand is the responsive change in the quantity demanded of a good or service by the change in the price of another good or service.
• Complementary goods are those goods which are consumed by the consumer together. You need the other good in order to utilize the other good.
• If the price of one of the goods rises by 5%. then the demand for the other good, holding other factors constant, will also rise as these goods are complementary goods having cross price elasticity of demand.

Hence, the final answer will be complementary goods and rise in the demand for the other good.

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