QQuestionEconomics
QuestionEconomics
"Suppose the cross-price elasticity of goods A and B is 1.5. What does that mean?The value of 1.5 being greater than one means their demands are inelastic.The positive value of 1.5 means they are substitutes for each other.The value of 1.5 being greater than one means their demands are elastic.The positive value of 1.5 means they are complement goods.e:
Suppose the cross-price elasticity of goods A and B is 1.5. What does that mean?
The value of 1.5 being greater than one means their demands are inelastic.
The positive value of 1.5 means they are substitutes for each other.
The value of 1.5 being greater than one means their demands are elastic.
The positive value of 1.5 means they are complement goods."
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Answer
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Step 1:: Identify the meaning of the cross-price elasticity value
- The cross-price elasticity of goods A and B is a measure of how sensitive the demand for good A is to changes in the price of good B, and vice versa.
Step 2:: Analyze the value of 1.5
- Since the cross-price elasticity is positive (1.5), it indicates that goods A and B are substitutes for each other. This means that if the price of good B increases, the demand for good A will increase, and vice versa.
Step 3:: Evaluate the demand elasticity
- The value of 1.5 being greater than one does not directly indicate whether the demands are elastic or inelastic. Elasticity refers to the responsiveness of demand to changes in other factors, such as price. In this case, we only know that the goods are substitutes, not whether their demands are elastic or inelastic.
Step 4:: Determine if the goods are complements or not
- A positive cross-price elasticity value (1.5) does not indicate that goods A and B are complement goods. Complement goods have a negative cross-price elasticity, meaning that an increase in the price of one good decreases the demand for the other good.
Final Answer
- The cross-price elasticity of goods A and B being 1.5 indicates that they are substitutes for each other. However, it does not provide information on whether the demands are elastic or inelastic, nor does it indicate if the goods are complements.
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