Suppose the price of cereal rose by 25% and the quantity of milk sold decreased by 50%.We know that the:
A)cross-price elasticity between cereal and milk is -2.
B)cross-price elasticity between cereal and milk is -0.5.
C)price elasticity of demand for milk is 2.
D)cross-price elasticity of demand between cereal and milk is 2.

Question

Quizplus · Accepted Answer

The cross-price elasticity of demand measures the responsiveness of the quantity demanded for a good to a change in the price of another good. It is calculated as the percentage change in quantity demanded of one good divided by the percentage change in price of the other good. Here, the quantity of milk sold decreased by 50% in response to a 25% increase in the price of cereal, so the cross-price elasticity between cereal and milk is -50%/25% = -2, indicating that cereal and milk are complements.

Suppose the Price of Cereal Rose by 25% and the Quantity