Suppose that a 20% decrease in the price of good Y causes a 20% increase in demand for good X.
The coefficient of cross-price elasticity of demand is what?
Two goods are gross complements, loosely speaking, when consumption of the two goods tend to increase or decrease together. More precisely, the two goods are gross complements when the cross price elasticity of demand is negative.
Answer and Explanation:
The cross price elasticity of demand is the percentage change in quantity demanded for X divided by the percentage change in the price of good Y. In this question, the percentage change in price of good Y is -20% (20% decrease), while the percentage change in the quantity demanded for good X is 20% (20% increase), thus the cross price elasticity is:
- cross price elasticity = 20% / (-20%)
- cross price elasticity = -1
Become a member and unlock all Study Answers
Try it risk-free for 30 daysTry it risk-free
Ask a question
Our experts can answer your tough homework and study questions.Ask a question Ask a question
Learn more about this topic:
from Economics 101: Principles of MicroeconomicsChapter 2 / Lesson 12