As the owner of a kayak tour business was looking over her financial records, she noticed that when the shop down the street increased the price of stand-up paddleboard tours by 10%, kayak tour sales increased by 15%. Which of these is a TRUE statement?
A) The cross elasticity of demand would be 15%/10% = 1.5, implying that the products are substitutes.
B) The income elasticity of demand would be 15%/10% = 1.5, implying that the products are normal goods.
C) The cross elasticity of demand would be 10%/15% = 0.67, implying that the products are substitutes.
D) The income elasticity of demand would be 10%/15% = 0.67, implying that the products are normal goods.

Question

Quizplus · Accepted Answer

The correct concept here is cross elasticity of demand, which measures the responsiveness of the demand for one good to a change in the price of another good. A positive cross elasticity indicates that the goods are substitutes, as seen with the increase in kayak tours when paddleboard tours became more expensive. The calculation is correctly done as 15%/10% = 1.5.

As the Owner of a Kayak Tour Business Was Looking