The price of product C rises by 10%. As a result, the quantity demanded of product D rises by 20%. The cross-price elasticity of demand between product C and product D is _____, and they are _____.
A)-2; substitutes
B)0.5; substitutes
C)2; substitutes
D)1.5; complements

Question

Quizplus · Accepted Answer

The cross-price elasticity of demand between product C and product D is calculated as the percentage change in the quantity demanded of D divided by the percentage change in the price of C. Using the numbers given, we get: Cross price elasticity of demand = (20 / 100) / (10 / 100) = 2. This means that product C and product D are substitutes, as a rise in the price of C led to an increase in the quantity demanded of D. Choice C is the correct answer.

The Price of Product C Rises by 10