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When the price of brand Imperial rises by 10%, the demand for brand Royal rises by 15%. The cross-price elasticity of Royal with respect to Imperial is:
A-1.5, so they are complements
B+1.5, so they are substitutes
C+0.67, so they are substitutes
D-0.67, so they are complements
Answer & Solution
Correct answer: B. +1.5, so they are substitutes
1. Use $E_c = \dfrac{\%\ \text{change in quantity of } X}{\%\ \text{change in price of } Y}$.
2. Substitute: $E_c = \dfrac{15\%}{10\%}$.
3. This equals $+1.5$.
4. A positive cross elasticity means the two brands are substitutes.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 2 Unit I "Law of Demand and Elasticity of Demand", p.34_
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