CIMA BA1 · Chapter 6 · Question 6 of 10
The price of Product B rises by 5% and, as a result, demand for Product A rises by 8%. What is the cross elasticity of demand for A with respect to the price of B, and what does it indicate?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) +1.6, indicating that A and B are substitutes
Explanation
Cross elasticity = % change in demand for A / % change in price of B = +8% / +5% = +1.6. A positive cross elasticity means that a rise in B's price increases demand for A, so the goods are substitutes.
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