The cross-price elasticity of demand between goods X and Y is −3.5.If the price of X decreases by 7 percent,the quantity demanded of Y will:
A) decrease by 24.5 percent.
B) decrease by 2.45 percent.
C) increase by 24.5 percent.
D) increase by 2.45 percent.

Question

Quizplus · Accepted Answer

A negative cross-price elasticity implies that X and Y are complements, which means that as the price of X falls, the quantity demanded of Y increases. The magnitude of the cross-price elasticity (-3.5) means that a 1% decrease in the price of X leads to a 3.5% increase in the quantity demanded of Y. Therefore, a 7% decrease in the price of X would lead to a 24.5% increase in the quantity demanded of Y (7% x -3.5 = -24.5%). The answer is C because the question asks for the change in the quantity demanded of Y, which increases by 24.5%.

The Cross-Price Elasticity of Demand Between Goods X and Y