In: Economics
The demand for company X's product is given by Qx =
12 – 3Px + 4Py. Suppose good X sells for
$3.00 per unit and good Y sells for $1.50 per unit.
a. Calculate the cross-price elasticity of demand between goods X
and Y at the given prices.
b. Are goods X and Y substitutes or complements? Explain your
answer.
c. What is the own price elasticity of demand at these prices?
b) The goods X and Y have a positive cross price elasticity of demand = 0.66 or approximately 0.67 which shows that if there is an increase in the prices of good X the demand for good Y increases whereas when there is an increase in the prices of good Y, the demand for good X increases. This clearly shows that the goods X and Y are substitute goods.