The figure given below shows the demand curves for five products: A, B, C, D, and E.Figure 6.1

-Assume that due to unfavorable conditions in a prime honey-producing area, the price of honey increases by 50 percent. The quantity consumed of herbal tea declines immediately by 25 percent. Everything else held constant, the:
A)cross-price elasticity of demand for herbal tea and honey is negative, and therefore the two goods are substitutes.
B)cross-price elasticity of demand for herbal tea and honey is negative, and therefore the two goods are complements.
C)cross-price elasticity of demand for herbal tea and honey is positive, and therefore the two goods are substitutes.
D)cross-price elasticity of demand for herbal tea and honey is positive, and therefore the two goods are complements.
E)cross-price elasticity of demand cannot be determined from the information provided.

Question

The figure given below shows the demand curves for five products: A, B, C, D, and E.Figure 6.1
 
-Assume that due to unfavorable conditions in a prime honey-producing area, the price of honey increases by 50 percent. The quantity consumed of herbal tea declines immediately by 25 percent. Everything else held constant, the:
A)cross-price elasticity of demand for herbal tea and honey is negative, and therefore the two goods are substitutes. 
B)cross-price elasticity of demand for herbal tea and honey is negative, and therefore the two goods are complements. 
C)cross-price elasticity of demand for herbal tea and honey is positive, and therefore the two goods are substitutes. 
D)cross-price elasticity of demand for herbal tea and honey is positive, and therefore the two goods are complements. 
E)cross-price elasticity of demand cannot be determined from the information provided.

Quizplus · Accepted Answer

The cross-price elasticity of demand is calculated as the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good. In this case, the quantity demanded of herbal tea decreases by 25% when the price of honey increases by 50%. This results in a negative cross-price elasticity, indicating that the goods are complements (not substitutes), as the increase in the price of one good leads to a decrease in the demand for the other.

The Figure Given Below Shows the Demand Curves for Five