A cross price elasticity of demand for product with respect to the price of product of 0.3 means that an increase in the price of A by 10 percent gives rise to an increase in quantity demanded of B by 3 percent.

Question

Quizplus · Accepted Answer

A cross price elasticity of demand of 0.3 means that the two products are somewhat related, but not strongly. An increase in the price of A by 10 percent would result in a decrease in quantity demanded of B, not an increase. Therefore, the statement is false. A cross price elasticity of demand of 0.3 actually means that an increase in the price of A by 10 percent results in a decrease in quantity demanded of B by 3 percent, not an increase. The sign of the elasticity is negative because A and B are substitute goods, meaning that an increase in the price of one product leads consumers to switch to the other product.

A Cross Price Elasticity of Demand for Product with Respect