XED1
What is cross-price elasticity of demand?
Cross-price elasticity of demand measures how the quantity demanded of one good changes in response to a change in the price of another good.
How is cross-price elasticity calculated?
Cross-price elasticity is calculated as the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good.
True or False: Cross price elasticity of demand can be negative.
True. Cross-price elasticity of demand can be negative for complementary goods, where an increase in price of good A leads to a decrease in demand for the good B.
What does a positive cross-price elasticity indicate?
A positive cross-price elasticity indicates that the two goods are substitutes. An increase in the price of one good leads to an increase in the quantity demanded of the other good.
Can cross-price elasticity be negative? If so, what does it indicate?
Yes, cross-price elasticity can be negative. A negative cross-price elasticity indicates that the two goods are complements. An increase in the price of one good leads to a decrease in the quantity demanded of the other good.
What does a cross-price elasticity of zero indicate?
A cross-price elasticity of zero indicates that the two goods are unrelated or independent in consumption. A change in the price of one good does not affect the quantity demanded of the other good.
Cross-price elasticity measures the responsiveness of the quantity demanded of one good to a change in the __________ of another good.
price
If the cross-price elasticity is positive, the goods are __________.
substitutes
If the cross-price elasticity is negative, the goods are __________.
complements
What happens to the demand for inferior goods as income increases?
The demand for inferior goods decreases as income increases because consumers switch to higher-quality substitutes.
Suppose the quantity demanded of Good X increases from 100 to 120 units when the price of Good Y decreases from $2 to $1. The cross-price elasticity of demand between Good X and Good Y would be:
- 4, complementary good
If the price of Good Y increases from $3 to $4, and as a result, the quantity demanded of Good X decreases from 80 to 60 units, the cross-price elasticity of demand between Good X and Good Y would be:
-0.75, complementary
If the cross-price elasticity of demand for two substitute goods is 1.5, it indicates that a 10% increase in the price of one will result in a ________% increase in the quantity demanded of the other.
15
When the cross price elasticity of demand for substitute goods is greater than 1, they are considered to be _________.
Highly substitutable
Substitute goods have a _________ relationship in terms of their prices and quantities demanded.
Direct
XED= 0.5, SUBSTITUTE GOOD
XED= -3.45, elastic, COMPLEMENTARY GOODS
If the price of tennis rackets decreases by 10% and the demand for tennis balls increases by 15%, what is the cross-price elasticity of demand between tennis rackets and tennis balls?
XED= -1.5 complementary good
A reduction in the price of Coke would result in a ____ change in demand of Pepsi
decrease
Complementary goods have _____________________
negative cross price elasticities of demand with respect to each other.
Why is understanding cross-price elasticity important for pricing decisions?
Understanding cross-price elasticity is important for pricing decisions because it helps businesses anticipate how changes in the prices of related goods will impact their own demand and revenue.
How does income elasticity of demand differ from cross-price elasticity of demand?
Income elasticity of demand measures how the quantity demanded of a good changes in response to changes in consumer income, while cross-price elasticity measures how the quantity demanded of one good changes in response to changes in the price of another good.
A 3 percent increase in the price of tea causes a 6 percent increase in the demand for coffee. The cross elasticity of demand for coffee with respect to the price of tea is:
XED = +2.0, elastic, substitute good
TRUE OR FALSE: It is reasonable to expect the cross price elasticity of demand for golf clubs and golf balls to be positive
FALSE
The cross elasticity of demand for Australian tourists visiting Indonesia is 2.4 when the price of visits to Malaysia increases by 5%. What is the percentage change in the number of Australian tourists visiting Indonesia?
12