The cross elasticity of demand between printers (X) and ink cartridges (Y) is −1.5. The price of cartridges rises by 10%. What is the expected effect on the quantity of printers demanded, and what does the sign tell us?
Answer and explanation
Correct answer: D. A fall of 15%, showing the goods are complements
- Step 1: Cross elasticity = % change in quantity of X ÷ % change in price of Y.
- Step 2: % change in X = −1.5 × 10% = −15%.
- Step 3: A negative value means a rise in the price of one reduces demand for the other, so they are complements.
Answer
A fall of 15%, showing the goods are complements.
Why not the others: A negative cross elasticity means complements, so demand falls when the other good's price rises. This divides 10% by 1.5 instead of multiplying. Cross elasticity does not measure inferiority; the sign shows complements or substitutes.
Practise more Social, technological, environmental and competitive factors.
Free questions with an explanation for every one, and full timed ACCA Applied Knowledge (BT, MA, FA) mock tests.
More Social, technological, environmental and competitive factors questions
- Which of Porter's five forces is increased when a company's customers can easily switch to a competitor's product at no cost?
- High capital requirements, strong brand loyalty and government licensing make it difficult for new firms to start up in an industry. Which o…
- A company decides to compete by offering a unique product that customers will pay a premium for. Which of Porter's generic strategies is thi…
- A company reports that it measures its performance against financial results, environmental impact and social impact. Which term describes t…
- A company's marketing claims that its products are environmentally friendly, but it has made no real changes to reduce its environmental imp…
- A manufacturer buys an automated machine that replaces five workers. Which type of PESTEL factor does the machine represent for the business…