Answer in Microeconomics for azie #180543
State the cross price elasticity (of demend). Suppose the price of a good (X) is RM5,
now the price of that good (X) increases by 5%. As a consequence, the demand of
another good (Y) decreases by 10%. What is the cross-price elasticity for the good
Y. Is the good (Y) is a substitue good or a complementary good to the first one?
i.) Price of good X =RM5
Price increases by 5% and Quantity decreases by 10%.
Cross price elasticity of demand=“% change in quantity of x% change in price of y”“frac{%Delta QX}{%Delta Py}”
EXY= “frac{-10%}{5 %}”
=-2
=This negative CED indicates good X and Y are complements.
ii.) This is a complementary good because it has a negative cross-price elasticity, since the percentage change in price is positive, the percentage change in quantity will be negative and vice-versa.
As the price for one item increases, an item closely associated with that item and necessary for its consumption decreases because the demand for the main good has also dropped.
