The cross elasticity of demand for good A with respect to the price of good B is -1.5.A 10 percent rise in the price of good B will lead to
A)an increase of 1.5 percent in the quantity of A demanded.
B)an increase of 15 percent in the quantity of A demanded.
C)a decrease of 15 percent in the quantity of A demanded.
D)an increase of 6.7 percent in the quantity of A demanded.
E)a decrease of 6.7 percent in the quantity of A demanded.

Question

Quizplus · Accepted Answer

A cross elasticity of demand of -1.5 means that goods A and B are complements. A 10 percent rise in the price of good B will lead to a decrease in the quantity demanded of good B, which in turn will lead to a decrease in the quantity demanded of good A. The magnitude of this decrease will be 1.5 times the percentage increase in the price of good B, which is 15 percent. Therefore, the quantity of A demanded will decrease by 15 percent.

The Cross Elasticity of Demand for Good a with Respect