Suppose that a 7 percent increase in the price of normal good Y causes a 4 percent increase in the quantity demanded of normal good X. The coefficient of cross elasticity of demand is
A)negative, and therefore these goods are substitutes.
B)positive, and therefore these goods are substitutes.
C)negative, and therefore these goods are complements.
D)positive, and therefore these goods are complements.

Question

Quizplus · Accepted Answer

The coefficient of cross 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 another good. In this case, a 7 percent increase in the price of good Y leads to a 4 percent increase in the quantity demanded of good X, indicating a positive cross elasticity of demand. This positive value suggests that the goods are substitutes, as the demand for one increases when the price of the other increases.

Suppose That a 7 Percent Increase in the Price of Normal