Question

10. The cross-price elasticity of demand between American Eagle and Hollister is 2.0. What does that coefficient tell us about the relationship between these two stores?

Answer 1

Answer: These two stores are substitutes(it means they are selling almost the Same product), because their cross elasticity of demand is positive, further any change in price of H store will effect twice on demand of A( American Eagle)

Explanation:— Coefficient of cross elasticity of demand of A and H = (%change in the quantity demanded of A)÷ (% change in the price of H)

2.0 × % change in price of H = % change in quantity demanded of A.

Thus, any change in price of H (Hollister) will double change the quantity demanded of A (American Eagle) Example: A 10 percent increase in price of H, will increase 2×10%=20% demand of A.

Further as coefficient of cross elasticity of demand of A and H is positive (+2) so they are substitutes,(If ec is negative then goods are complementary ).