Question

# The cross elasticity of demand for good A and good B is minus−0.7. This means that  ...

The cross elasticity of demand for good A and good B is

minus−0.7.

This means that

A.

if the price of good A increases by 10​ percent, the quantity demanded of good B decreases by 7 percent.

B.

the goods are substitutes.

C.

if the price of good A increases by 10​ percent, the quantity demanded of good B increases by 7 percent.

D.

the goods are complements.

E.

both A and D are correct.

E. Both A and D are correct

Explanation: Cross elasticity of demand measures the responsiveness of the quantity demanded of one good with change in the price of another good. Here, cross elasticity of demand = % change in quantity demanded by B/ % change in the price of A. So, when the cross elasticity of demand for good A and good B is minus−0.7, it means that if the price of good A increases by 10 percent, the quantity demanded of good B decreases by 7 percent. Also, cross elasticity is negative when the goods are complementary and positive when the goods are substitutes.