When product A is a complement for product B, the cross elasticity of demand for products A and B will be: a

Economics Jan 19, 2021

When product A is a complement for product B, the cross elasticity of demand for products A and B will be:

a. one

b. negative

c. positive

d. increasing

Expert Solution

Answer: B

As stated above, cross-price elasticity of demand (CPED) is defined as . Thus, if two goods are complements, a rise in price of one decreases the quantity demanded of the other. This is because consumers view them as a bundle and the price of the bundle just increased. Therefore, the numerator and the denominator will have different signs and thus CPED is negative.

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