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 increases by 5 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 2.4 percent.
B) The demand for fuel will increase by 5 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

A negative cross price elasticity of demand means that the two goods are complements (i.e., they are consumed together). Therefore, if the price of transport increases, the demand for fuel will fall. The magnitude of the cross price elasticity (-0.48) indicates that a 5 percent increase in the price of transport will lead to a 2.4 percent decrease in the demand for fuel (0.48 multiplied by 5).

The Cross Price Elasticity of Demand for Fuel with Respect