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Suppose that when the price of good X falls from $10 to $8, the quantity demanded of good Y rises from 20 units to 25 units. Using the midpoint method, the cross-price elasticity of demand is:_______

a. -1.0, and X and Y are complements.
b. -1.0, and X and Y are substitutes.
c. 1.0, and X and Y are complements.
d. 1.0, and X and Y are substitutes.

Respuesta :

Answer:1.0 and X and Y are substitutes.

Explanation:

Elasticity is the degree of responsiveness of the change in price to a change in quantity demanded. Cross elasticity considers 2 products.

Old price $10

New price $8

Old quantity 20 units

New quantity 25 units

Formula: (change in quantity demandedY/change in priceX) * (old priceX/old quantityY)

{ (25-20) / ($10-$8) } * (10/20) = 1.25

Decision Rule:

> 0 the 2 products are substitutes

< 0 the 2 products are complements

= 0 the 2 products are independent

From the calculation, the products are substitutes because its Elasticity is greater than 0.

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