When the price of a CD player falls from $110 to $90 and other things remain the

Question

When the price of a CD player falls from $110 to $90 and other things remain the same, the quantity demanded of CD players increases from 40 to 60 an hour, the quantity demanded of MP3s decreases from 105 to 95 an hour, and the quantity demanded of CDs increases from 92 to 108 an hour MP3s and CD players are_____. complements because a fall in the price of a CD player brings a decrease in the quantity demanded of MP3s complements because a fall in the price of a CD player brings an increase in the quantity demanded of MP3s substitutes because a fall in the price of a CD player brings a decrease in the quantity demanded of MP3s sometimes complements and sometimes substitutes substitutes because a rise in the price of a CD player brings a decrease in the quantity demanded of MP3s The cross elasticity of demand for MP3s with respect to CD players is .

Explanation / Answer

M and C are substitutes because a fall in C’s price decreases M’s quantity demand.

Answer: Option ‘c’ is correct.

Cross-elasticity of demand between M and C = Percentage change in M’s demand / Percentage change in C’s price

                                                                  = {(105 – 95)/105} / {(110 – 90)/110}

                                                                  = 0.5 (Answer)

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