Day: August 23, 2017

Following an increase in the price of Product Z by 7%, Product Y saw a decrease in demand by 5 %. Which of the following is true?

Select ONE answer:

1. The cross elasticity of demand (XED) of Product Y is -0.71; Product Z and Y are complements
2. The cross elasticity of demand (XED) of Product Y is +0.71; Product Z and Y are complements
3. The cross elasticity of demand (XED) of Product Y is -1.4; Product Z and Y are substitutes
4. The cross elasticity of demand (XED) of Product Y is +1.4; Product Z and Y are substitutes
5. The cross elasticity of demand (XED) of Product Y is +0.71; Product Z and Y are substitutes

What is the definition of a substitute good in economics and give examples?
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This is multiple choice question is suitable for Economics KS5 classes.

The answer is 1 – Formula for Cross Elasticity of Demand EA, B = % increase in quantity demanded of A / % increase in price of product B i.e. -5% (decrease in Quantity demanded) / +7% (increase in price) = -0.71 which shows the products are complements. In economics, a complementary good or complement is a good with a negative cross elasticity of demand, in contrast to a substitute good. This means a good’s demand is increased when the price of another good is decreased. Conversely, the demand for a good is decreased when the price of another good is increased.

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