Lesson 11 - Cross Elasticity Of Demand

Question 1

What is the cross elasticity of demand?

Answer 1

the responsiveness of the change in demand of one good as a result of a change in the price of another

Question 2

What does a positive cross elasticity indicate?

Answer 2

the two goods are substitutes

Question 3

What does a negative cross elasticity indicate?

Answer 3

the two goods are complements

Question 4

XED > 1

Answer 4

elastic

Question 5

XED < 1

Answer 5

inelastic

Question 6

XED = 0

Answer 6

no relationship between the two goods or services

Question 7

What is the equation for XED?

Answer 7

% change in demand for A / % change in price of B

Question 8

What is the impact of the internet on XED?

Answer 8

becoming easier to compare prices of goods and choose which one to buy - reduces a firms ability to raise their prices above their competitions, resulting in XED being more elastic

Question 9

What does a high positive XED signal to suppliers?

Answer 9

• they should cut prices to attract customers, since demand is very elastic

Question 10

What does a low positive XED signal to suppliers?

Answer 10

• they can raise prices to increase profits