two goods have cross price elasticity of demand +1.2 (a) would you describe the goods as substitutes or compliments (b) if the price of one f\goods rise by 5 percent what will happen to demand for the another good holding other factors constant
Answers
Answer:
Cross Elasticity of Demand Formula
\begin{aligned} &E_{xy} = \frac {\text{Percentage Change in Quantity of X} }{ \text{Percentage Change in Price of Y} } \\ &\phantom{ E_{xy} } = \frac { \frac { \displaystyle \Delta Q_x }{ \displaystyle Q_x } }{ \frac { \displaystyle \Delta P_y }{ \displaystyle P_y } } \\ &\phantom{ E_{xy} } = \frac {\Delta Q_x }{ Q_x } \times \frac {P_y }{ \Delta P_y } \\ &\phantom{ E_{xy} } = \frac {\Delta Q_x }{ \Delta P_y } \times \frac {P_y }{ Q_x } \\ &\textbf{where:} \\ &Q_x = \text{Quantity of good X} \\ &P_y = \text{Price of good Y} \\ &\Delta = \text{Change} \\ \end{aligned}
E
xy
=
Percentage Change in Price of Y
Percentage Change in Quantity of X
E
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P
y
ΔP
y
Q
x
ΔQ
x
E
xy
=
Q
x
ΔQ
x
×
ΔP
y
P
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E
xy
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ΔP
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ΔQ
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×
Q
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P
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where:
Q
x
=Quantity of good X
P
y
=Price of good Y
Δ=Change