Question

If the cross elasticity of demand goods and X is negative, state how the goods are related to each other.

Answer 1

Cross elasticity of demand is said to be negative when a fall in the price of Y leads to an increase in the demand for X. Complementary goods have negative cross elasticities. For example, bread and butter are complementary goods. A fall in the price of butter causes an increase in the quantity purchased of not only butter, but of bread also. Thus, a change in the price of butter and in the quantity of bread demanded will have opposite signs, i.e., cross elasticity is negative.