Question

7. For the following pairs of goods, would you expect the cross-price elasticity of demand to be positive, negative, or zero? Briefly explain. a) Peanut Butter and Jelly b) Shoes and sandals c) Orange Juice and Apple Juice d) Televisions and DVD players e) T-shirts and gasoline

Answer 1

a) The cross-price elasticity of demand for peanut butter and jelly is negative because these are complementary goods and hence are consumed together. Thus fall in price of the peanut butter will lead to the fall in the demand of jelly and vice-versa.

b) The cross-price elasticity of demand for shoes and sandals is positive because these are supplimentary goods and hence one can be used in place of other. Thus, the fall in the price of shoes will lead to the increase in the demand of the sandals and vice-versa.

c) The cross-price elasticity of demand for orange-juice and apple-juice is positive because these are supplimentary goods and hence fall in price of one good leads to the increase in the demand of another one.

d) The cross-price elasticity of demand for televisions and DVD players is negative because these are complimentary goods and hence fall in price of televisions will lead to the fall in the demand of DVD players and vice-versa.

e) The cross-price elasticity of demand for T-shirts and gasoline is zero because these are independent goods and hence change in the price of one good does not affect the demand of another good.