When the price of good X increases by 20 percent, the quantity demanded of good Y increases by 40 percent. The cross-price elasticity of demand is equal to _____, and these goods are:
A) 0.5; complements.
B) 2; complements.
C) -0.5; substitutes.
D) 2; substitutes.

Question

Quizplus · Accepted Answer

The cross-price elasticity of demand is calculated as the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good. Here, it is (40% / 20%) = 2. A positive cross-price elasticity indicates that the goods are substitutes, as the demand for one increases when the price of the other increases.

When the Price of Good X Increases by 20 Percent