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Chapter 6: 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. When the cross elasticity of demand for two services is negative, it indicates that the services are complements, meaning they are closely related and typically consumed together. This results in the demand for one service decreasing when the price of the other service increases.

Step by step solution

01

Define cross elasticity of demand

Cross elasticity of demand is a measure of how the quantity demanded of one good or service (let's call it Good A) changes in response to a change in the price of another good or service (let's call it Good B). It can be calculated by dividing the percentage change in the quantity demanded of Good A by the percentage change in the price of Good B. Mathematically, we can represent cross elasticity of demand as: \(Cross \, Elasticity \, of \, Demand = \frac{Percentage \, Change \, in \, Quantity \, Demanded \, of \, Good \, A}{Percentage \, Change \, in \, Price \, of \, Good \, B}\)
02

Define complements and substitutes

Complements are goods or services that are usually consumed together or are closely related. When the price of one complement increases, the demand for its complement typically decreases. In this case, cross elasticity of demand is negative. Examples include coffee and sugar, or cars and gasoline. Substitutes, on the other hand, are goods or services that can replace each other in consumption. When the price of one substitute increases, the demand for its substitute typically increases as well. In this case, cross elasticity of demand is positive. Examples include tea and coffee, or butter and margarine.
03

Determine the correct answer

Given that the cross elasticity of demand for the two services is negative, this indicates that when the price of one service increases, the demand for the other service decreases. This behavior is consistent with the definition of complements. Therefore, the correct answer is: a) complements

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Most popular questions from this chapter

Which statement is the most accurate? (LO7, 5) a) The demand for gasoline is very elastic. b) The demand for home heating oil is very inelastic. c) The seller of a perishable commodity has a relatively elastic supply. d) Most firms can double their output in the short run.

During a very bad recession the nation's disposable income fell by 10 percent, while its consumption of a certain good rose by 5 percent. That good was good. (LO4) a) a complementary b) a substitute c) a normal good d) an inferior good

If demand is elastic and price is lowered, total revenue will (LO3) a) rise b) fall c) stay the same d) possibly rise or possibly fall

A perfectly elastic supply curve is (LO1) a) a horizontal line b) a vertical line c) neither a horizontal nor a vertical line

Demand is elastic if (LO1) a) percentage change in quantity is greater than percentage change in price b) percentage change in price is greater than percentage change in quantity c) percentage change in quantity demand is zero d) percentage change in price is zero e) percentage change in quantity is equal to percentage change in price
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