Cross-price elasticity for widgets and McBoover devices when McBoover price falls from $11 to $9 and widgets demand increases is

Cross-price elasticity for widgets and McBoover devices when McBoover price falls from $11 to $9 and widgets demand increases is

• A. 2.0
• B. -0.5
• C. -2.0
• D. 0.5

Answer: (C)

Cross-price elasticity of demand tells us how the quantity demanded of one good responds to a change in the price of another. Here, the price of McBoover devices falls, and widgets’ demand rises. Since the price change is a fall (negative percent change in Py) and the quantity demanded of widgets increases (positive percent change in Qx), the cross-price elasticity will be negative, indicating that the two goods are complements. Compute the percent change in McBoover price: (9 − 11) / 11 = −2/11 ≈ −18.18%. If the cross-price elasticity is −2.0, then the percent change in widgets demanded must be %ΔQx = (−2.0) × (−18.18%) ≈ +36.36%. So the stated elasticity corresponds to widgets’ demand rising about 36% when McBoover’s price falls from 11 to 9, reflecting a strong complementary relationship.

Cross-price elasticity of demand tells us how the quantity demanded of one good responds to a change in the price of another. Here, the price of McBoover devices falls, and widgets’ demand rises. Since the price change is a fall (negative percent change in Py) and the quantity demanded of widgets increases (positive percent change in Qx), the cross-price elasticity will be negative, indicating that the two goods are complements.

Compute the percent change in McBoover price: (9 − 11) / 11 = −2/11 ≈ −18.18%. If the cross-price elasticity is −2.0, then the percent change in widgets demanded must be %ΔQx = (−2.0) × (−18.18%) ≈ +36.36%. So the stated elasticity corresponds to widgets’ demand rising about 36% when McBoover’s price falls from 11 to 9, reflecting a strong complementary relationship.