ACCA BT · Chapter 3 · Question 3 of 11
The price of product Y rises by 8% and, as a result, the quantity demanded of product X rises by 4%. What is the cross elasticity of demand for X with respect to the price of Y, and what is the relationship between the goods?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) +0.5; substitutes
Explanation
Cross elasticity = percentage change in quantity of X / percentage change in price of Y = +4% / +8% = +0.5. A positive cross elasticity means that when Y becomes more expensive consumers switch to X, so the goods are substitutes. Complements have a negative cross elasticity. The value 2.0 results from inverting the ratio.
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