The sign of the cross-price elasticity tells us whether two commodities are complements or substitutes,but the size of this elasticity measure tells us
A)how the supply side of the market reacts to changes in demand
B)whether the government should regulate the two markets
C)which technology producers use
D)how closely the two goods are related
E)whether or not excess profits can be made in either market

Question

Quizplus · Accepted Answer

The size of the cross-price elasticity measure tells us how closely the two goods are related. A larger magnitude of elasticity indicates a stronger relationship, while a smaller magnitude indicates a weaker relationship. For example, if the cross-price elasticity between coffee and tea is -2, then a 10% increase in the price of coffee will result in a 20% increase in the quantity demanded of tea, indicating that coffee and tea are strong substitutes. If the cross-price elasticity between coffee and cream is 0.5, then a 10% increase in the price of coffee will result in a 5% increase in the quantity demanded of cream, indicating that coffee and cream are weak complements.

The Sign of the Cross-Price Elasticity Tells Us Whether Two