Answer:
A) A 20% price increase for Product A causes a 10% decrease in its quantity demanded, but no change in the quantity demanded for Product B. .
The cross price elasticity of demand is zero between product A and product B.(No relationship)
B) Product C increases in price from $5 a pound to $11 a pound. This causes the quantity demanded for product D to increase from 10 units to 18 units.
Definitely, with increase in price of product C, the quantity demanded of product C will decrease.
Cross-Price Elasticity of demand is negative between product C and product D(They are Compliments)
C) when the price of Product E decreases 9%, this causes its quantity demanded to increase by 14% and the quantity demanded for Product F to increase 12%. Cross-Price Elasticity demand = 18/12. Positive. (product E and product F are subtitles)
Explanation:
CROSS PRICE ELASTICITY OF DEMAND = (% change in quantity demanded for Product A)/( % change in price of product B)
If cross price elasticity > 0, then the two goods are substitutes
If cross price elasticity = 0, then the two goods are independent
If cross price elasticity < 0, then the two goods are complements
From this example we can see that the answer 2 tells us that butter and margarine are substitute goods for each other. When the price of margarine went up, more people switched to butter. You can increase the sales of one good, by increasing the price of the other.
