A product has a cross-elasticity of demand of – 0.2 in relation to another product.
What does this indicate?
Select ONE answer:
- It is a close complement to another product.
- It is a distant complement to another product.
- It is a close substitute for another product.
- It is a distant substitute for another product.
Show your workings to arrive at your answer, and explain and justify your reasons:……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………
This multiple choice question is suitable for Economics KS5 classes.
The answer is 2
- A close complement would have a high negative XED.
- Correct: the minus figure indicates that the product is a complement and the low figure of 0.2 suggests that it is not very responsive to a change in the price of the product it is purchased to use with it.
- A close substitute would have a high positive XED.
- A distant substitute would have a low figure such 0.2 but it would be a positive and not a negative figure.
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