What does it tell you if the cross price elasticity of demand between two products is +2?
A) The products are substitutes and a price increase in one by 3% decreases demand for the other by 1.5%.
B) The products are complements and a price increase in one by 3% decreases demand for the other by 1.5%.
C) The products are complements and a price increase in one by 3% decreases demand for the other by 6%.
D) The products are substitutes and a price increase in one by 3% increases demand for the other by 6%.

Question

Quizplus · Accepted Answer

A positive cross price elasticity of demand indicates that the two products are substitutes. A value of +2 means that a 1% increase in the price of one product leads to a 2% increase in the demand for the other product. Therefore, a 3% price increase would increase demand for the other product by 6%.

What Does It Tell You If the Cross Price Elasticity