Question

Suppose that a 20 percent increase in the price of normal good Y causes a 10 percent decline in the quantity demanded of normal good X. The coefficient of cross elasticity of demand is:______ a) negative, and therefore these goods are substitutes. b) negative, and therefore these goods are complements. c) positive, and therefore these goods are substitutes. d) positive, and therefore these goods are complements.

Answer 1

Answer:

The coefficient of cross elasticity of demand is negative, and therefore these goods are complements.

Explanation:

Cross elasticity of demand is the proportionate change in the quantity demanded to the proportionate change in the price of the related goods.

Cross elasticity of demand is negative in case of complementry goods as proportionate increase in price of one goods lead to decrease in the demand of related goods as both are complimentry and demanded jointly. Example: Petrol and car.

Cross elasticity of demand is positive in case of subtitute goods as proportionate decrease in price of one goods lead to decrease in the demand of substitute goods. Example: Tea and Coffee.