The cross-price elasticity of demand between good X and good Y is -0.8. What does this imply about the relationship between the two goods?
Understand the Problem
The question is asking us to interpret the cross-price elasticity of demand value of -0.8. Specifically, it is looking for an understanding of the relationship between the two goods based on this negative elasticity.
Answer
Goods X and Y are complements.
The final answer is that goods X and Y are complements.
Answer for screen readers
The final answer is that goods X and Y are complements.
More Information
A negative cross-price elasticity indicates that an increase in the price of one good leads to a decrease in the demand for the other, showing they are complementary goods.
Tips
A common mistake is to confuse complementary goods with substitute goods. Positive cross-price elasticity indicates substitutes, while negative indicates complements.
Sources
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