-The increase in the demand for widgets, shown in the figure above, is the result of a decrease in the price of McBoover devices from $11 to $9. Therefore, the cross-price elasticity for these two products is
A) -2.0.
B) -0.5.
C) 0.5.
D) 2.0.

Question

-The increase in the demand for widgets, shown in the figure above, is the result of a decrease in the price of McBoover devices from $11 to $9. Therefore, the cross-price elasticity for these two products is
A) -2.0. 
B) -0.5. 
C) 0.5. 
D) 2.0.

Quizplus · Accepted Answer

The cross-price elasticity of demand is a measure of the responsiveness of the demand for one good to a change in the price of another good. In this case, the demand for widgets has increased as the price of McBoover devices has decreased. This suggests that the two products are substitutes, and that a decrease in the price of one product will lead to an increase in the demand for the other. The cross-price elasticity of demand is calculated as the percentage change in the quantity demanded of one good divided by the percentage change in the price of the other good. In this case, the percentage change in the quantity demanded of widgets is 20% and the percentage change in the price of McBoover devices is -18.2%. Therefore, the cross-price elasticity of demand is 20% / -18.2% = -1.1. This is closest to choice A, -2.0.

-The Increase in the Demand for Widgets, Shown in the Figure