34 The extent to which the demand for a good changes when th

34. The extent to which the demand for a good changes when the price of a substitute or complement changes, other things remaining the same, is measured as the ) income elasticity of demand. B) cross price elasticity of demand. C) price elasticity of demand. D) price elasticity of supply E) cross income elasticity of demand. 35. If a 1 percent increase in the price of X increases the quantity demanded of Y by 2 percent,then X and Y are A) complements and the cross price elasticity of demand equals 2. B) complements and the cross price elasticity of demand equals -2. C) substitutes and the cross price elasticity of demand equals 2. D) substitutes and the cross price elasticity of demand equals 1/2. E) complements and the cross price elasticity of demand equals -1/2.

Solution

ANSWER:

1) Cross price elasticity of demand (definition of cross price elasticity) that is option b.

2) cross price elasticity = increase in quantity demanded of y / increase in price of x = 2% / 1% = 2 and the two are substitutes as price increase in x is increasing the quantity demanded of y. so answer is option c.