Cross Elasticity of Demand Calculation Quiz

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.