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Questions and Answers
What does a Cross-Price Elasticity of Demand (XED) value of 0 indicate?
What does a Cross-Price Elasticity of Demand (XED) value of 0 indicate?
- Goods X and Y are perfect substitutes.
- An increase in the price of Y decreases the demand for X.
- There is no relationship between the price of good Y and the quantity demanded of good X. (correct)
- Goods X and Y are close complements.
If the Cross-Price Elasticity of Demand (XED) between two goods is positive, what can be inferred about these goods?
If the Cross-Price Elasticity of Demand (XED) between two goods is positive, what can be inferred about these goods?
- They are independent goods with no effect on each other.
- They are complementary goods.
- They are inferior goods.
- They are substitutes for each other. (correct)
Which of the following scenarios exemplifies a negative Cross-Price Elasticity of Demand (XED)?
Which of the following scenarios exemplifies a negative Cross-Price Elasticity of Demand (XED)?
- The price of pasta rises, resulting in increased demand for alternative noodles.
- The price of coffee increases, leading to a decrease in the quantity demanded for creamer. (correct)
- The price of a specific smartphone brand goes up, causing an increase in demand for a different brand.
- An increase in the price of gas leads to more people opting for public transportation.
What happens to the demand for good X when the price of good Y, which is a close substitute, increases?
What happens to the demand for good X when the price of good Y, which is a close substitute, increases?
In the context of Cross-Price Elasticity of Demand, which of the following concepts best describes 'close complements'?
In the context of Cross-Price Elasticity of Demand, which of the following concepts best describes 'close complements'?
Flashcards
XED = 0
XED = 0
There is no relationship between the price of good Y and the quantity demanded of good X.
XED > 0
XED > 0
Goods X and Y are substitutes. A higher price for Y increases demand for X.
XED < 0
XED < 0
Goods X and Y are complements. A higher price for Y reduces demand for X.
Cross-Price Elasticity
Cross-Price Elasticity
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Substitutes
Substitutes
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Study Notes
Cross Elasticity of Demand (XED)
- XED measures responsiveness of quantity demanded of one good (good X) to a change in price of another good (good Y)
- XED = (% change in quantity demanded of X) / (% change in price of Y)
- If XED is positive, goods are substitutes (e.g., if price of X increases, demand for Y increases). The demand curve is upward sloping.
- If XED is negative, goods are complements (e.g., if the price of X increases, demand for Y decreases). The demand curve is downward sloping.
- If XED is zero, goods are unrelated (e.g., price changes in one good have no effect on demand for the other).
Substitutes
- Close substitutes: A small increase in the price of good X leads to a large increase in the quantity demanded of good Y. The demand curve for good Y is relatively steep.
- Weak substitutes: A large increase in the price of good X leads to a small increase in the quantity demanded of good Y. The demand curve for good Y is relatively flat.
Complements
- Close complements: A small decrease in the price of one good leads to a large increase in the quantity demanded for the other. The demand curve for good Y is relatively steep.
- Weak complements: A large decrease in the price of one good leads to a small increase in the quantity demanded for the other. The demand curve for good Y is relatively flat.
Unrelated Goods
- Price changes in one good have no effect on the demand for the other
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