Question

Use a written essay format to answer the following questions

1. Using the correct relative value of the Cross Price Elasticity of Demand (E_x) (+,−, or 0) for each of the following products, please identify the expected economic relationship (complements, substitutes, or unrelated) between the following product pairs, and provide logical economic reasons for the classification:
   1. Digital broadband music and compact discs (CD’s)
   2. Coal and natural gas
   3. New smart phones and milk
   4. Popcorn and soft drinks at the cinema

Answer 1

(a)

Digital broadband music and CDs are substitutes in consumption. Therefore, increase (decrease) in price of one of them will increase (decrease) the demand for the other. As a result, cross-price elasticity will be positive.

(b)

Coal and natural gas are substitutes in consumption. Therefore, increase (decrease) in price of one of them will increase (decrease) the demand for the other. As a result, cross-price elasticity will be positive.

(c)

New smart phones and milk are unrelated goods. Therefore, increase (decrease) in price of one of them will not change the demand for the other. As a result, cross-price elasticity will be zero.

(d)

Popcorns and soft drinks are used together, and are complements in consumption. Therefore, increase (decrease) in price of one of them will decrease (increase) the demand for the other. As a result, cross-price elasticity will be negative.