Suppose the cross elasticity of demand for products A and B is +3.6 and for products C and D is –5.4. a. What can you conclude about how products A and B are related? . b. What can you conclude about products C and D? .
Question
Suppose the cross elasticity of demand for products A and B is +3.6 and for products C and D is –5.4. a. What can you conclude about how products A and B are related? . b. What can you conclude about products C and D? .
Solution 1
a. Products A and B are substitutes. This is because the cross elasticity of demand is positive, indicating that as the price of product A increases, the demand for product B also increases, and vice versa.
b. Products C and D are complements. This is because the cross elasticity of demand is negative, indicating that as the price of product C increases, the demand for product D decreases, and vice versa. This suggests that products C and D are often used together, so a price increase in one decreases demand for the other.
Solution 2
a. Products A and B are substitutes. This is because the cross elasticity of demand is positive, indicating that as the price of product A increases, the demand for product B increases, and vice versa.
b. Products C and D are complements. This is because the cross elasticity of demand is negative, indicating that as the price of product C increases, the demand for product D decreases, and vice versa. This suggests that products C and D are often used together, so a price increase in one decreases demand for the other.
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