The cross elasticity of demand (Exy) measures the responsiveness of the quantity demanded of one good (Y) to a change in the price of another good (X). It is calculated using the formula:

$E_{xy} = \frac{\% \text{ change in quantity demanded of good Y}}{\% \text{ change in price of good X}}$

Given:

• % change in quantity demanded of good Y = +10%
• % change in price of good X = +5%

Substituting the values:

$E_{xy} = \frac{10\%}{5\%} = 2$

The cross elasticity of demand is 2.

Since the cross elasticity is positive, it indicates that the two goods are substitutes. This is because an increase in the price of good X leads to an increase in the demand for good Y, which is typical for substitute goods.

Summary:

• Cross elasticity of demand: 2
• Type of goods: Substitutes

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Related Questions:

1. How does cross elasticity of demand differ for complements and substitutes?
2. What are some examples of substitute goods in everyday markets?
3. How does income elasticity differ from cross elasticity of demand?
4. What happens to the cross elasticity of demand when two goods are independent?
5. How can firms use cross elasticity of demand in pricing strategy?

Tip:

For complementary goods, the cross elasticity of demand is negative, indicating that an increase in the price of one good leads to a decrease in the demand for the other.