Question

For each of the following product pairs, what would you guess about their cross price elasticity of demand. Would you expect it to be positive or negative? Would you expect it to be a large or small number? Explain your answer? a) dress pants and belts b) gasoline and SUVs c) bread and bagels d) butter and margarine

Answer 1

Ans) Cross price elasticity is the responsiveness of quantity demanded of one product to the change in price of another product.

For substitutes, cross price elasticity is positive while for complementary goods it is negative.

1) Dress pants and belts ÷ are complementary goods. Therefore, they will have negative cross price elasticity. The number is expected to be small as one can wear pants without belts.

2) Gasoline and SUV÷ are complementary goods and therefore, they have negative cross price elasticity. Number is expected to be large as gasoline is necessary to drive the car.

3) Bread and bagels÷ are substitutes and hence have positive cross price elasticity. Number is expected to be lower as bagel is not perfect substitute for bread.

4) Butter and margarine ÷ are substitutes and hence will have positive cross price elasticity. Number is expected to be higher as both are used as spreads.