Question

Suppose the demand curve for good X is of the form: qx=1000 + I – 50px...

Suppose the demand curve for good X is of the form: qx=1000 + I – 50px -20py. Suppose, px=$10, py=$10, and income (I)=$100.

1)

Cross price elasticity of demand between X and Y = -1/2, and X and Y are complements.
2)

Cross price elasticity of demand between X and Y = 1/2, and X and Y are complements.
3)

Cross price elasticity of demand between X and Y = -1/2, and X and Y are substitutes.
4)

Cross price elasticity of demand between X and Y = -3/2, and X and Y are complements.
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Answer #1

A is correct.

The goods are complements because as the price of good Y increases the demand for good x reduces. It works as follows. When price of Y rises, the demand for y falls. And since these two goods x and y are complements or consumed together, the demand for x also falls.

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