The price of A falls by 2 percent, and the quantity demanded of A increases by 2 percent. Meanwhile, the quantity demanded of B increases by 2 percent too. We would conclude that
A) demand for A is elastic, and A and B are substitutes.
B) demand for A is elastic, and A and B are complements.
C) demand for A is unit-elastic, and A and B are complements.
D) demand for A is inelastic, and A and B are unrelated.

Question

Quizplus · Accepted Answer

The price elasticity of demand for A is calculated as the percentage change in quantity demanded divided by the percentage change in price, which in this case is 2%/(-2%) = -1, indicating unit elasticity. The simultaneous increase in quantity demanded for both A and B suggests they are complements, as the increase in demand for one leads to an increase in demand for the other.

The Price of a Falls by 2 Percent, and the Quantity