Suppose that the amount of portable power banks demanded increases by 10 percent when the price of personal computers falls by 5 percent. The cross price elasticity of demand between portable power banks and personal computers is
A) 0.5.
B) -2.0.
C) -0.5.
D) 2.0.

Question

Quizplus · Accepted Answer

Cross-price elasticity of demand is defined as the percentage change in quantity of a good demanded divided by the percentage change in the price of another good.

In this case, the percentage change in quantity demanded of portable power banks is 10% and the percentage change in the price of personal computers is -5%. Therefore, the cross-price elasticity of demand can be calculated as:

E(sub)pc,ppb = (% change in Qd of PPB) / (% change in price of PC)
E(sub)pc,ppb = (10%)/(-5%)
E(sub)pc,ppb = -2.0

Since the cross-price elasticity of demand is negative, this suggests that the two goods are complements (i.e. their demand is inversely related). Therefore, if the price of personal computers falls, the demand for portable power banks will increase, and vice versa.

Hence, the correct answer is B.

Suppose That the Amount of Portable Power Banks Demanded Increases