Cross Elasticity of Demand (XED)

Question 1

What does XED stand for?

Answer 1

Cross Elasticity of Demand

Question 2

What does XED measure?

Answer 2

The responsiveness of the quantity demanded of one good to a change in the price of another good.

Question 3

What is the formula for XED?

Answer 3

XED = % Change in Quantity Demanded of Good A ÷ % Change in Price of Good B

Question 4

If XED is positive, what type of goods are involved?

Answer 4

Substitutes

Question 5

If XED is negative, what type of goods are involved?

Answer 5

Complements

Question 6

What does a high positive XED indicate?

Answer 6

Strong substitutes (e.g., Coke and Pepsi)

Question 7

What does a high negative XED indicate

Answer 7

Strong complements (e.g., Printers and Ink)

Question 8

What does it mean if XED = 0?

Answer 8

The goods are unrelated (e.g., Bread and iPhones)

Question 9

What’s the relationship between price and demand for complements?

Answer 9

If the price of Good B goes up, demand for Good A goes down (and vice versa).

Question 10

What’s the relationship between price and demand for substitutes?

Answer 10

If the price of Good B goes up, demand for Good A goes up.

Question 11

XED = -2.5 between printers and printer ink. What does this tell us?

Answer 11

The goods are complements, strongly related (elastic). As printer price goes up, ink demand falls sharply.

Question 12

XED = +0.2 between MacBooks and Surface laptops. What does this tell us?

Answer 12

The goods are substitutes, weakly related (inelastic). As MacBook price rises, Surface demand rises slightly.

Question 13

On a cross elasticity (XED) diagram, what goes on each axis?

Answer 13

Y-axis = Price of one good

X-axis = Quantity demanded of the related good

Question 14

What does a downward-sloping demand curve on an XED diagram show?

Answer 14

The goods are complements (XED < 0). As the price of one good rises, demand for the other falls.

Question 15

What does an upward-sloping demand curve on an XED diagram show?

Answer 15

The goods are substitutes (XED > 0). As the price of one good rises, demand for the other also rises.

Question 16

What does a steep curve (complement or substitute) on an XED diagram mean?

Answer 16

The goods are weakly related (XED < 1). Demand changes less than price.

Question 17

What does a shallow/flatter curve on an XED diagram mean?

Answer 17

The goods are strongly related (XED > 1). Demand changes more than price.

Question 18

Give an example of a strong complement and a weak substitute.

Answer 18

Strong complement: Razors and razor blades (shallow downward slope)

Weak substitute: MacBooks and Surface laptops (steep upward slope)