A cross price elasticity of demand for product with respect to the price of product of 0.3 means that
A)an increase in the price of A by 10 percent gives rise to an increase in quantity demanded of B by 3 percent.
B)an increase in the price of B by 10 percent gives rise to an increase in the quantity demanded of A by 3 percent.
C)an increase in the price of B by 10 percent gives rise to a decrease in the quantity demanded of A by 3 percent.
D)an increase in the price of A by 10 percent gives rise to a decrease in the quantity demanded of B by 3 percent.

Question

Quizplus · Accepted Answer

The cross-price elasticity of demand measures the responsiveness of the quantity demanded of one good to changes in the price of another good. A positive cross-price elasticity indicates that the two goods are substitutes, while a negative cross-price elasticity indicates that the two goods are complements. In this case, a cross-price elasticity of demand of 0.3 means that a 10% increase in the price of B will lead to a 3% increase in the quantity demanded of A. This indicates that A and B are likely substitutes. Therefore, option B is the correct answer. A positive cross price elasticity coefficient indicates that the two goods are substitutes. Therefore, an increase in the price of good B will lead to an increase in demand for a substitute good A. A coefficient of 0.3 signifies that a 10% increase in the price of B is followed by a 3% increase in the quantity demanded of A.

A Cross Price Elasticity of Demand for Product with Respect