Cross Elasticity of Demand Calculation Quiz

If the price of Good Y remains constant, what will be the new level of demand for Good Y when the price of Good X rises to 25 pence?

What is the meaning of a cross elasticity of demand of -1 between Good Y and Good X?

If the cross elasticity of demand was positive instead of negative, what would be the effect on the demand for Good Y?

What happens to demand for Good Y if the price of Good X decreases to 15 pence?

If the cross elasticity of demand between Good Y and Good X was -0.5, what would be the impact on the demand for Good Y when the price of Good X increases?

Understanding Cross Elasticity of Demand

Cross elasticity of demand measures the responsiveness of demand for one good (Good Y) to changes in the price of another good (Good X).
A negative cross elasticity of demand signifies that the two goods are complements. This means that an increase in the price of one good leads to a decrease in demand for the other.
Conversely, a positive cross elasticity of demand indicates that the two goods are substitutes. If the price of one good increases, the demand for the other good will increase as consumers seek alternatives.

Scenario Analysis

If the price of Good X increases to 25 pence, and the cross elasticity of demand between Good Y and Good X is -1, the demand for Good Y will decrease by 1% for every 1% increase in the price of Good X.
If the cross elasticity of demand was positive, an increase in the price of Good X would lead to an increase in the demand for Good Y because consumers would switch to Good Y as a cheaper alternative.
When the price of Good X decreases to 15 pence, the demand for Good Y would likely increase, assuming the goods are complements.
If the cross elasticity of demand between Good Y and Good X was -0.5, a 1% increase in the price of Good X would result in a 0.5% decrease in demand for Good Y. This implies a weaker relationship between the two goods compared to a cross elasticity of -1.

Test your knowledge of cross elasticity of demand by calculating the new level of demand for Good Y when the price of Good X changes. In this scenario, the cross elasticity of demand with respect to Good X is -1 and the initial demand for Good Y is given.