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The cross-price elasticity between goods X and Y is -0.8. If the price of Y rises by 20%, the quantity demanded of X will change by:
ARise by 16%
BFall by 16%
CFall by 25%
DRise by 25%
Answer & Solution
Correct answer: B. Fall by 16%
1. Use $E_c = \dfrac{\%\ \text{change in quantity of } X}{\%\ \text{change in price of } Y}$.
2. Rearrange: % change in $X = E_c \times \%$ change in price of $Y$.
3. Substitute: $-0.8 \times 20\% = -16\%$.
4. The negative sign means quantity of X falls by 16% (X and Y are complements).
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 2 Unit I "Law of Demand and Elasticity of Demand", p.35_
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