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Suppose that a 20% decrease in the price of good Y causes a 20% increase in demand for good X....

Question:

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?

Gross Complements:

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

Learn more about this topic:

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Cross Price Elasticity of Demand: Definition and Formula

from Economics 101: Principles of Microeconomics

Chapter 2 / Lesson 12
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