Question 2 (c)

Cross-price elasticity of demand, with examples

2 marks

Time to write: About 4 minutes
Topic: Elasticity of demand and supply

Question

Question 2 (c) · 2 marks

Explain the cross-price elasticity with an example.

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

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Read off the question and its marks

4 minfor 2 marks

Read from the question

exampleExamples are asked for: one short example with each point.

Write it in this order

1 Meaning and formula 1 mark 2 min
2 Sign for substitutes and complements, with an example 1 mark 2 min

Easy marks

Step 1 opens with the meaning: a one-line definition, the quickest mark in it.

Try it first. About 4 minutes for 2 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

Meaning. Cross-price elasticity of demand measures how strongly the quantity demanded of one good, X, responds to a change in the price of a related good, Y, X's own price and other things held constant:

eXY = (% change in quantity demanded of X) ÷ (% change in price of Y).

Sign of the measure.

Substitutes: a rise in the price of one makes buyers turn to the other, so the demand for X moves in the same direction as the price of Y, and eXY is positive.
Complements (goods used together): a rise in the price of one reduces the demand for the other, so the two move in opposite directions, and eXY is negative.

Example (our own). If the price of mustard oil rises by 20 per cent and the quantity of groundnut oil demanded rises by 10 per cent, eXY = 10 ÷ 20 = +0.5: the oils are substitutes. If mobile data packs become 25 per cent dearer and smartphone sales fall by 5 per cent, eXY = −5 ÷ 25 = −0.2: the two are complements.

Where the 2 marks sit

#	Component	Marks
1	Meaning and formula	1
2	Sign for substitutes and complements, with an example	1
	Total	2

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