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

Question

Quizplus · Accepted Answer

The goods are substitutes because an increase in the price of one leads to an increase in the demand for the other. 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 the other good, which is 2% / 5% = 0.40.

If a Price Hike of 5 Percent Increases the Quantity