The cross price elasticity of demand between goods X and Y is -3.5.If the price of X decreases by 7%, the quantity demanded of Y will:
A)decrease by 24.5%.
B)decrease by 2.45%.
C)increase by 24.5%.
D)increase by 2.45%.

Question

Quizplus · Accepted Answer

The cross price elasticity of demand between goods X and Y being -3.5 indicates that they are complementary goods, which means that an increase in the price of X will result in a decrease in the demand for Y.

Therefore, a decrease in the price of X by 7% will result in an increase in the demand for Y. The magnitude of this increase can be calculated using the following formula:

% Change in Quantity Demanded of Y = (Cross Price Elasticity of Demand) x (% Change in Price of X)

% Change in Quantity Demanded of Y = (-3.5) x (-7%)

% Change in Quantity Demanded of Y = 24.5%

Thus, the quantity demanded of Y will increase by 24.5%. Therefore, the best choice is C.

The Cross Price Elasticity of Demand Between Goods X and Y