Question

if the cross-price elasticity between ketchup and hamburgers is -1.2, a 4% increase in the price of ketchup will lead to a 4.8%:

a. increase in quantity demanded of ketchup.

b. drop in quantity demanded of hamburgers.

c. increase in quantity demanded of hamburgers.

d. drop in quantity demanded of ketchup.

Answer 1

When due to % change in the price of one goods leads to change in the % change in the quantity demand, it is known as the cross price elasticity demand.

Cross-price elasticity of demand= % change in the quantity demand/ % change in the price

When the cross-price elasticity demand sign is positive, then both goods will be substitute goods.

When the cross-price elasticity demand sign is negative, then both goods will be complementary goods.

the cross-price elasticity between ketchup and hamburgers is= -1.2

% change in the Qd / % change in price                                   =-1.2

% change in the Qd / 4%                                                           =-1.2

% change in the Qd of hamburger                                              =-1.2*4

                                                                                                     = -4.8%

It means that a 4% increase in the price of ketchup will lead to a 4.8% drop in quantity demanded of hamburgers.

Hence option second is the correct answer.