Answer to Question #107566 in Microeconomics for sawaiz

Question

when the price of product A decreased from $2 to $1, the consumer bought 28 units of product B instead of 20. What is the consumer's cross-price elasticity of demand for these two products? What does the calculated elasticity imply about the relationship between product A and product B for this consumer?

Answer 1

We can calculate cross-price elasticity with this formula: 

E= $((Q2-Q1)/Midpoint Q)*(Midpoint P/(P2-P1))$

So, E = ((28-20)/24)/(1.5/(1-2))= -0.5.

From that we can say that these two products are complementary goods, as decrease of price of one leeds to increase of consumption of another.