If the price of one good increases by 3 percent and the quantity demanded of another good increases by 2 percent, the cross elasticity is ________ and the two goods are ________.
A) 2/3, substitutes
B) 2/3, complements
C) 3/2, complements
D) 3/2, substitutes

Question

Quizplus · Accepted Answer

The cross elasticity is calculated as the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good. In this case, the cross elasticity is 2/3, which means that a 1% increase in the price of the first good will lead to a 2/3% increase in the quantity demanded of the second good. This indicates that the two goods are substitutes, as an increase in the price of one good will lead to an increase in the demand for the other good.

If the Price of One Good Increases by 3 Percent