Question

1) A negative cross-elasticity of demand means that the goods in question are _____ while a negative income elasticity means that the good in question is a(n) _____.

substitutes; normal good

substitutes; inferior good

complements; normal good

complements; inferior good

2) Alex finds a new job as an economist at a factory that makes two types of chips: computer and potato. Alex calculates the cross elasticity of demand between computer and potato chips to be a very small negative number. This means:

Computer and potato chips are weak substitutes

Computer and potato chips are weak complements

Computer and potato chips are completely unrelated

Computer and potato chips are strongly related

3) If Aspen Ski Resort offers a 25% discount on ski lift tickets, and the quantity of ski rentals increases by 20%, the cross elasticity of demand is:

0.8 and the two goods are substitutes

-0.8 and the two goods are complements

1.25 and the two goods are substitutes

-1.25 and the two goods are complements

Answer 1

1) complements: inferior good

Cross Price elasticity is negative for complements and income elasticity is negative for inferior goods.

2) Computer and potato chips are weak complements

Small cross price elasticity means goods are not strongly related.

3) -0.8 and the two goods are complements.

Cross price elasticity= 20/(-25)- 0.8