Lesson 32

Question 1

XED

Answer 1

cross elasticity of demand

Question 2

XED measures

Answer 2

the degree to which demand responds to a change in price of another good

Question 3

Complements

Answer 3

price of one good up

quantity demanded of another down

e.g. iphones and iphone cases

Question 4

Substitutes

Answer 4

price of one good up

quantity demanded of another up

breads

Question 5

Formula for XED

Answer 5

percentage change in demand of Product A / percentage change in price of Product B

Question 6

XED example question:

If product B’s price increases by 10%, the quantity demanded of Product A decreases by 10%, the PED is?

Answer 6

-10% / + 10% = -1

Means Product A is a complement of Product B

Question 7

XED of:

+1 to + infinity means

+ example

Answer 7

elastic substitute

when the price of Product B changes, the demand of Product A changes by a large percent in the same direction

e.g. if the price of pepsi increases, consumers will buy more coke by a large percent ( in comparison to the price increase in pepsi)

Question 8

XED of:

0 to +1 means

+ example

Answer 8

inelastic substitute

when the price of Product B changes, the demand for Product A changes by a small percent in the same direction

e.g. an increase in price will mean consumers switch over to substitutes by a relatively small amount e.g. with tea and coffee

Question 9

XED of:

0 to -1 means

+ example

Answer 9

Inelastic complement

When the price of Product B changes, the quantity demanded for Product A changes by a relatively small amount in the opposite direction

e.g. if the price of butter increases, the demand for bread might decrease, but only by a small amount relative to the price change, as there are other things that can be served with bread instead

Question 10

XED of:

-1 to - infinity means

+ example

Answer 10

elastic complement

when the price of Product B changes, the quantity demanded of Product A changes by a large percent in the opposite direction

no example given in textbook