If a price hike of 5 per cent increases the quantity demanded of another good by 2 per cent, the goods must be _______ and the cross elasticity of demand equals _______.
A) substitutes; 2.5
B) complements; 2.5
C) substitutes; 0.40
D) complements; 0.40

Question

Quizplus · Accepted Answer

The goods are substitutes because an increase in the price of one good increases the demand for the other good. The cross elasticity of demand is calculated as the percentage change in quantity demanded of one good divided by the percentage change in price of another good, which is 2% / 5% = 0.40.

If a Price Hike of 5 Per Cent Increases the Quantity