Chapter 19, Problem 10P

To determine

The value of cross-price elasticity of demand between goods X and Y is 1.25, while the cross-price elasticity of demand between goods X and Z is -2.0. Characterize X and Y and X and Z as substitute or complements.

Concept Introduction:

Cross Price Elasticity of demand: It refers to the degree of responsiveness to change in the quantity demanded of one product due to change in the price of another product. It can be calculated as follows:

$e_{xy}=$ $\frac{\% change in quantity demanded of product "x"}{\% change in the price of product "y"}$

The goods will be substitute goods, if the cross price elasticity is positive, because any increase in the price of good "y", will increase the quantity demanded of good "x".

The goods will be complemented goods, if the cross price elasticity is negative, because any increase in the price of good "y", will decrease the quantity demanded of good "x".

Perfect Substitute goods: The two goods are perfect substitutes when they can be used in the place of each other. For example, tea and coffee. When the price of tea increases, the quantity demanded coffee rises.

Perfect complements: The two goods are perfect complements when they can be used together. For example, ink and printer. When the price of ink rises, the quantity demanded printer falls.