Give an example of cross-price elasticity of demand that involves a substitute and another that involves a complement. Calculate a sample cross-price elasticity of demand for each.
What will be an ideal response?
Examples will vary but should show a thorough understanding of how cross-price elasticity of demand relates to substitutes and complements. For example, the price for orange juice could increase by 5 percent, causing an increase in demand for apple juice of 10 percent. The resulting cross-price elasticity of demand is +2 (+10% ¸ +5% = +2%). The goods are substitutes because the price of one good and the demand for the other move in the same direction. The price for tennis racquets could decrease by 7 percent causing an increase in demand for tennis balls of 21 percent. The resulting cross-price elasticity of demand is –3 (+21% ¸ –7% = –3). The goods are complements because the price of one good and the demand for the other move in opposite directions.
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Because a monopolist must cut its price to increase its sales by one unit,
A. MR > P at every output level. B. MC > MR at every output level. C. P > MR at every output level. D. MC > P at every output level.
Collusion among oligopolistic firms
A. is common in world markets, but does not happen in the U.S. B. becomes easier during a recession when sales are falling. C. becomes more difficult if the firms all have different cost and demand curves. D. becomes more difficult if there were fewer firms in the group.