Cross Price Elasticity

Question 1

Definition Of Cross Elasticity Of Demand

Answer 1

Refers to how sensitive the demand for a product is to changes to price of another.

Question 2

What is the cross elasticity of demand for substitute goods ?

Answer 2

Positive

Question 3

What does a positive cross elasticity of demand mean ?

Answer 3

When the demand of one good increases when the price for the substitute increases.

Question 4

Formula of cross elasticity of demand

Answer 4

percentage change in the demand of good 1/percentage change in the price of good 2.

Question 5

What result will the cross elasticity of demand give unrelated goods ?

Answer 5

0.

Question 6

What result will the cross elasticity of demand give for different types of substitutes ?

Answer 6

• Strong substitutes : higher
• Weak substitutes : lower (e.g. coffee & tea).

Question 7

What is the cross elasticity of demand for complementary goods ?

Answer 7

Negative.

Question 8

What does a negative cross elasticity of demand mean ?

Answer 8

As the price of one item increases, the demand for the complementary good decreases because the demand for the main good has also dropped.

Question 9

What is the importance of XED ?

Answer 9

• Helps firms understand the relationship between products and their prices
• Used by firms to make pricing decisions.