The price of product C is cut 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)-0.75; complements
B)-1.25; complements
C)-2; complements
D)1.25; complements

Question

Quizplus · Accepted Answer

Cross-price elasticity of demand measures how sensitive the demand for one product is to a change in the price of another product. The formula for calculating cross-price elasticity of demand is (% change in quantity demanded of product A)/(% change in price of product B). 
Here, the price of product C has decreased by 10%, which has led to a 20% increase in the quantity demanded of product D. Using the formula, we can calculate the cross-price elasticity of demand between C and D as (20/10) = 2. 
Since the cross-price elasticity of demand is greater than 1, we can conclude that C and D are complements. When the price of C decreases, the demand for D increases by a relatively larger percentage, indicating that they are used together or are complementary products.

The Price of Product C Is Cut by 10