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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?
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?
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)?
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?
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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'?
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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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Description
Explore the concept of Cross Elasticity of Demand (XED) and its implications for substitute and complement goods. This quiz covers the definition, calculation, and interpretation of XED, along with examples of how goods interact in response to price changes. Test your understanding of economic relationships between goods.
