Problem 27 When the cross elasticity of dem... [FREE SOLUTION]

Chapter 18: Problem 27

When the cross elasticity of demand for two services is negative, then these services are (LO4) a) complements b) substitutes c) both complements and substitutes d) neither complements nor substitutes

Short Answer

Expert verified

The correct answer is a) complements. Since the cross elasticity of demand is negative, it indicates that the two services are complements, meaning they are used together and an increase in the price of one service will cause a decrease in the quantity demanded for the other service.

Step by step solution

Understand cross elasticity of demand

Cross elasticity of demand measures the responsiveness of the quantity demanded for one good or service to a change in price of another good or service. It is calculated using the following formula: Cross Elasticity of Demand = \(\frac{\% \: Change \: in \: Quantity \: Demanded \: of \: Good \: A}{\% \: Change \: in \: Price \: of \: Good \: B}\) The sign of the cross elasticity of demand indicates the relationship between the goods or services. A positive value implies that the goods or services are substitutes, a negative value implies that they are complements, and a value of zero or close to it indicates that they are unrelated.

Analyze the given information

We are given that the cross elasticity of demand for two services is negative. This means that when the price of one of the services increases, the quantity demanded for the other service decreases.

Determine the relationship between the services

Based on the information given, since the cross elasticity of demand is negative, the two services are complements. This means that they are used together, and an increase in the price of one service will cause a decrease in the quantity demanded for the other service.

Choose the correct answer

Based on our analysis, we can conclude that: - If the cross elasticity of demand is negative, the services are complements. - Therefore, the correct answer is: a) complements