The cross price elasticity of demand for fuel with respect to the price of transport (e.g., automobile travel including insurance, etc.) has been estimated to be -0.48.If the price of transport falls by 10 percent in a period, how will that affect the demand for fuel in that period, all other things unchanged?
A) The demand for fuel will increase by 4.8 percent.
B) The demand for fuel will increase by 10 percent.
C) The demand for fuel will not change because many people prefer to ride the subway.
D) The demand for fuel will fall.

Question

Quizplus · Accepted Answer

The cross price elasticity of demand for fuel with respect to the price of transport is -0.48, meaning that a 10% decrease in the price of transport will result in a 4.8% increase in the demand for fuel (0.48*10%=4.8%). Therefore, the correct answer is A: The demand for fuel will increase by 4.8 percent.

The Cross Price Elasticity of Demand for Fuel with Respect