The price of product A is cut by 30%. As a result, the quantity demanded of product B rises by 40%. The cross-price elasticity of demand between product A and product B is _____, and they are _____.
A)-0.75; substitutes
B)-1.25; complements
C)-1.33; complements
D)1.25; complements

Question

Quizplus · Accepted Answer

The cross-price elasticity of demand (CPE) measures the responsiveness of the quantity demanded of product B to changes in the price of product A. We can use the CPE formula to solve for it:

CPE = %ΔQ_B / %ΔP_A

We are given two pieces of information:

- The price of product A is cut by 30%, so %ΔP_A = -30%.
- The quantity demanded of product B rises by 40%, so %ΔQ_B = 40%.

Plugging these values into the CPE formula gives:

CPE = 40% / (-30%) = -1.33

Since the CPE is negative, we know that product A and B are complements. Choice (C) is the only option that matches this conclusion.

The Price of Product a Is Cut by 30