Question

5. Explain what a cross-price elasticity of -5.50 means. 6. Explain what a cross-price elasticity of 0.50 means.

Answer 1

The cross elasticity of demand for substitute goods is always positive because the demand for one good increases when the price for the substitute good increases.

While the cross elasticity of demand for complementary goods is negative. As the price for one item increases, an item closely associated with that item and necessary for its consumption decreases because the demand for the main good has also dropped.

5. As cross price elasticity is negative, so goods are complements

and cross price elasticity of -5.50 means that if the price of the complement good change by 1% then the quantity demanded of the good change by 5.50%.

6. Similarly, as cross price elasticity is positive, so goods are substitute of each other.

and cross price elasticity of 0.50 means that if the price of the substitute good change by 1% then the quantity demanded of the good change by 0.50%