Suppose that when the price of root beer rises 10%, the quantity of pizza demanded falls 20%. This would mean that pizza and root beer are
A) substitutes, with a cross price elasticity of 0.5.
B) complements, with a cross price elasticity of -0.5.
C) substitutes, with a cross price elasticity of -2.0.
D) complements, with a cross price elasticity of -2.0.

Question

Quizplus · Accepted Answer

The negative sign indicates that the two goods are complements. The magnitude of the cross price elasticity (-2.0) means that a 10% increase in the price of root beer leads to a 20% decrease in the quantity demanded of pizza, indicating a strong complementarity between the two goods.

Suppose That When the Price of Root Beer Rises 10