The price of product A is cut by 50%. As a result, the quantity demanded of product B rises by 50%. The cross-price elasticity of demand between product A and product B is _____, and they are _____.
A)-0.75; complements
B)-1.25; complements
C)-1; complements
D)1.25; complements

Question

Quizplus · Accepted Answer

A negative cross-price elasticity indicates that the two products are complements. The cross-price elasticity is calculated as the percentage change in quantity demanded of product B divided by the percentage change in the price of product A. In this case, the price of product A is reduced by 50%, so the percentage change is -50%. The quantity demanded of product B increases by 50%, so the percentage change is +50%. Therefore, the cross-price elasticity is -50%/+50% = -1, which means that a 50% decrease in the price of product A leads to a 1% increase in the quantity demanded of product B. Option C is the closest to the result from the calculation.

The Price of Product a Is Cut by 50