If the cross-price elasticity of demand for SUVs with respect to the price of gasoline is -0.10,and gasoline prices rise by 18 percent,then SUV sales should,ceteris paribus,
A)Fall by 1.8 percent.
B)Fall by 18 percent.
C)Rise by 1.8 percent.
D)Rise by 18 percent.

Question

Quizplus · Accepted Answer

The negative sign of the cross-price elasticity indicates that SUVs are complements to gasoline, meaning as the price of gasoline increases, the demand for SUVs decreases. The magnitude of the elasticity (-0.10) indicates that for every 1% increase in the price of gasoline, SUV sales will decrease by 0.1%. Therefore, with an 18% increase in gasoline prices, SUV sales should decrease by 1.8% (0.1% x 18 = 1.8%).

If the Cross-Price Elasticity of Demand for SUVs with Respect