00:01
In order to solve this problem, we're first going to want to have a basic understanding of what cross -price elasticity means.
00:06
So i have this formula here, which shows that cross -price elasticity in this situation is going to be the percentage change in quantity demanded of apples divided by the percentage change in price of oranges.
00:18
Because we're dealing with changes in the price of oranges, and then we want to see how quantity demanded for apples would change in response.
00:28
And we're also told that the cross -price elasticity here is going to be equal to 0 .4.
00:33
So this equals 0 .4.
00:37
So our biggest clue of whether or not these goods are going to be substitutes, which means if the price in oranges rises, that means quantity demanded for apples will increase because people want to buy less oranges since they're more expensive, right? or complements, and in this other situation, if they would be complements, this is when if the price of oranges were to increase, quantity demand of apples would decrease because if people normally eat apples and oranges together, if people are buying less oranges, they're also buying less apples.
01:10
For instance, to decide if cross -price elasticity is substitute or complementary goods, we want to look at if it's negative or positive.
01:19
Right.
01:20
So negative cross -price elasticity.
01:24
Let me make this figure so we can read it easier.
01:27
So negative cross -price elasticity is going to mean that these goods are complements.
01:34
And the reason for that is, so as price of good x increases, that means quantity demanded of good y is going to decrease.
01:47
Right.
01:47
And this makes sense because you're buying less of good x, which means you're also buying less of good y...