Question

Suppose customers at a Mexican-Chinese restaurant treat Mexican carne asada and General Tso’s chicken as complements. The cross price elasticity will be of Mexican Carne Asada and General Tso’s chicken is

A) equal to zero

B) larger than zero

C) less than zero

D)positive infinity

And why!

Thanks! :)

Answer 1

Ans. C) less than zero.

Cross Price Elasticity = (% change in the demand of Good X) / (% change in the price of its compliment Good Y)

As we know when the price of a complimentary good increases the demand for the other good decreases as well. Here we have Mexican Carne Asada and General Tso’s chicken as compliments to each other. If the price of one good increases the demand for the other good decreases.

When we substitute these in the above formula we see that the signs of the numerator and demonminator are always opposite, as an increase in price reduces demand and decrease in price increases demand. So since they have opposite signs the Cross Price elasticity will always be negative or Less than Zero