3.3 Cross Price Elasticity of Demand (XED)

Question 1

What is Cross Price Elasticity of Demand (XED)?

Answer 1

XED measures the responsiveness of demand for good X following a change in the price of a related good Y.

Question 2

What happens to the demand for a substitute product when the price of another substitute increases?

Answer 2

An increase in the price of one good (ceteris paribus) will lead to an increase in demand for a rival product.

Question 3

What is the value of XED for two substitutes?

Answer 3

The value of XED for two substitutes is always positive.

Question 4

What happens to the demand for a complementary product when the price of the other complementary product falls?

Answer 4

A fall in the price of one product causes an increase in demand for the complementary product.

Question 5

What is the value of XED for two complements?

Answer 5

The value of XED for two complements is always negative.

Question 6

Calculate the XED given the following: % change in demand of Y = 5%, % change in price of X = 10%.

Answer 6

XED = +0.5.

Question 7

What does a positive XED value indicate about the relationship between two goods?

Answer 7

It indicates that the goods are substitutes.

Question 8

What does a negative XED value indicate about the relationship between two goods?

Answer 8

It indicates that the goods are complements.

Question 9

What is the XED for good Y if % change in price of X = -50% and % change in demand for Y = +60%?

Answer 9

XED for good Y = -1.2.

Question 10

What characterizes close substitutes in terms of cross price elasticity of demand?

Answer 10

Close substitutes have a strongly positive cross price elasticity.

Question 11

What characterizes strong complements in terms of cross price elasticity of demand?

Answer 11

Strong complements have a highly negative cross elasticity.

Question 12

What is the cross elasticity of unrelated products?

Answer 12

Unrelated products have zero cross elasticity.

Question 13

Fill in the blank: A small rise in the price of X causes a ______ rise in demand for Y.

Answer 13

large

Question 14

Fill in the blank: A small fall in the price of A causes a ______ rise in demand for B.

Answer 14

large

Question 15

What is the impact of a large rise in the price of S on the demand for T?

Answer 15

It leads to a small increase in demand for T.

Question 16

What does a cross price elasticity of +1.5 suggest about the relationship between pizza and pasta?

Answer 16

It suggests that pizza and pasta are substitutes.

Question 17

If Mario sells 3,000 pasta dishes at £7.50 before a pizza price cut, what is the expected change in demand for pasta?

Answer 17

Calculate based on the percentage change in demand resulting from the price cut.

Question 18

What should Mario consider when deciding whether to keep pizza at £8 or revert to £10 based on total revenue?

Answer 18

He should consider the price elasticity of demand for pizza.

Question 19

True or False: The stronger the relationship between two products, the higher the coefficient of cross-price elasticity of demand.

Answer 19

True