Cross Elasticity measures

Question

BlackTom AI · Accepted Answer

Cross-price elasticity of demand equals the percentage change in quantity demanded of one good divided by the percentage change in the price of another good.

1. Relevant concepts
- Cross-price elasticity (Exy) measures responsiveness of demand for good X to price changes of good Y.
- Formula: Exy = (% change in Qx) / (% change in Py).
- Sign and magnitude: positive Exy → substitutes; negative Exy → complements; value is unitless and indicates sensitivity (larger absolute value = more responsive).

2. Step-by-step reasoning
- Identify the two variables: quantity demanded of product X (Qx) and price of product Y (Py).
- Compute percentage changes for Qx and Py.
- Divide the percent change in Qx by the percent change in Py to get Exy.
- Interpret sign and magnitude to determine relationship.

3. Example calculation (all intermediate steps)
- Suppose Py rises from $10 to $11 (change = +$1). Percentage change in Py = (11 − 10)/10 = 0.10 = 10%.
- Suppose Qx increases from 100 units to 105 units (change = +5). Percentage change in Qx = (105 − 100)/100 = 0.05 = 5%.
- Exy = (%ΔQx) / (%ΔPy) = 0.05 / 0.10 = 0.5.
- Interpretation: Exy = +0.5 implies X and Y are substitutes and demand for X is moderately responsive to Y’s price.

4. Why the correct answer is correct
- The correct option states that cross elasticity measures how sensitive purchases of one product are in response to price changes of a different product, which matches the definition and formula above.

5. Why the other options are incorrect
- Options referencing "quality" confuse price effects with non-price attributes; cross elasticity specifically concerns price, not quality.
- The option about sensitivity to changes in the price of the same product describes own-price (own-price elasticity), not cross-price elasticity.

6. Conclusion
- Therefore, the correct answer is: how sensitive people's purchases of one product are in response to changes in the price of a different product. This matches the provided answer.

Cross Elasticity measuresMultiple choice

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