Question

The cross-price elasticity of demand for steak with respect to a change in the price of pork chops is estimated to be 0.42.

What would be the effect on the quantity of steak demanded if the price of pork chops increased by 5%?

Are steak and pork chops substitutes or complements?

Answer 1

Cross price elasticity of demand for steak = Percentage change in quantity demanded of steak / Percentage change in price of product pork chops.

0.42 = percentage change in quantity demanded of steak / 5%

Percentage change in quantity demanded of steak = 0.42 * 5% = 2.1%

So, if the price of pork chops increased by 5%, the quantity demanded of steak would increase by 2.1%. This means that due to the price increase of pork chops, people would substitute more of steak by increasing their quantity demanded of steak and buy less of pork chops.

From the above explaination, we understand that both are substitutes. We can also understand whether two goods are substitutes if the cross price elasticity of demand is positive.

Here, since the cross-price elasticity of demand for steak with respect to a change in the price of pork chops is estimated to be 0.42, i.e. it is more than 0 and it is a positive number, so pork chops and steak are substitutes.