The cross-price elasticity of Good “A” is .24. If Good A increases in price by 10%,...
The cross-price elasticity of Good “A” is .24. If Good A increases in price by 10%, it will
Select one:
a. result in Good B increasing in price by 2.4%
b. result in Good B decreasing in price by .24%
c. result in Good B decreasing in price by 24%
d. result in Good B increasing in price by .024%
Homework Answers
Cross price elasticity of Good A is 0.24
The value of cross price elasticity is positive.
This means that Good A and Good B are substitute of each other.
In case of substitute goods, increase in price of a good leads to increase in quantity demanded of another.
The demand for Good A has increased by 10%.
So, price of Good B must have increased.
Increase in the price of Good B = Cross price elasticity of Good A * Increase in demand for Good A
Increase in the price of Good B = 0.24 * 10 = 2.4
Thus,
The price of Good B has increased by 2.4%.
Hence, the correct answer is the option (a).
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