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23 February, 13:06

If the cross price elasticity of demand for two goods is measured to be 1.32. What can you deduce the relationship between these two goods?

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  1. 23 February, 15:58
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    The two goods are substitutes.

    Explanation:

    The cross-price elasticity of demand measures the change in the demand of a commodity because of a change in the price of relative good. It is calculated as the ratio of change in demand and change in the price of the other good.

    If cross-price elasticity of demand for two goods is 1.32, it implies that a proportionate change in the price of relative goods causes the demand for the good to change by more than proportionate in the same direction.

    For instance, an increase in the price of relative good causes a more than proportionate increase in the demand for the good.

    This implies that the two goods are substitutes.
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