Suppose the price of pepper increases by 20percent and, as aresult, the quantity of salt demanded (holding the price of salt constant) decreases by 2 percent
The cross-price elasticity of demand between pepper and salt is (Enter your response rounded to two decimal places and include a minus sign if appropriate.)
In this example, pepper and salt are
Instead, suppose pepper and salt were substitutes.
If so, then the cross-price elasticity of demand between prepper and salt would be:.
1. Less than 1 but greater than 0
2. Negative
3. Greater than 1
4. Positive
5. Zero

1. -0.1 %

2. complements

3. positive

Explanation:

The cross elasticity of demand refers to the concept of responsiveness in the quantity demanded of one item when the price for another item changes.

1.

Cross-price elasticity of demand = %change in quantity demanded / %change in price

Cross-price elasticity of demand = -2/ 20 = -1/10 = -0.1 %

The negative sign indicates that the two items are complements.

2.

In this example, pepper and salt are complements which means when the price of salt increases than there will be a decrease in the demand of pepper.

3.

if pepper and salt were substitutes then cross-price elasticity of demand between pepper and salt would be positive since when two goods are substitutes then an increase in the price of salt, causes an increase in the demand of pepper.

Bonus:

Whenever an increase in the price of an item results in a decreased demand of another item than the cross-price elasticity of demand will always be negative.

Whenever an increase in the price of an item results in a constant demand of another item than the cross-price elasticity of demand will be zero and the two items are said to be independent.

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