There are three goods you are interested in purchasing, X, Y and Z. You notice that the price of Z has fallen. Given that the cross price elasticity between Z and Y is − 1.5; the cross price elasticity between Y and X is 3.0, and the cross price elasticity between Z and X is 0.50. It would make sense that:
A) Z and X are complements; Y and X are substitutes.
B) Y and X are substitutes; Y is complementary to Z.
C) X and Z are unrelated; Y is complementary to X.
D) X and Z are complements; Y and Z are substitutes.

Question

Quizplus · Accepted Answer

If the cross price elasticity between Z and Y is negative (−1.5), it means that these two goods are complements. If the cross price elasticity between Y and X is positive (3.0), it means that Y and X are substitutes. Finally, if the cross price elasticity between Z and X is positive (0.50), it means that Z and X are also substitutes. Therefore, the answer is B, where Y and X are substitutes, and Y is complementary to Z.

There Are Three Goods You Are Interested in Purchasing, X