The cross-price elasticity between two products is estimated to be 2. If the price of the first product is increased by 8%, demand for the second product will _____.
A) increase by 8%
B) decrease by 4%
C) increase by 4%
D) increase by 16%
E) decrease by 8%

Question

Quizplus · Accepted Answer

Cross-price elasticity measures the responsiveness of demand for one product to a change in the price of another product. If the cross-price elasticity is positive, the two products are substitutes, meaning if the price of one product goes up, consumers will switch to the other product, increasing demand for it.

In this case, since the cross-price elasticity is 2, we know that the two products are substitutes. If the price of the first product is increased by 8%, we can expect demand for the second product to increase by twice that, or 16%. Therefore, the correct answer is D, "increase by 16%".

The Cross-Price Elasticity Between Two Products Is Estimated to Be