Question

From the following, identify the correct definition of the cross-price elasticity of demand for commodity X with respect to Commodity Y.

• A. The percentage change in demand of commodity X to the percentage change in price of commodity Y
• B. The percentage change in price of commodity X to the percentage change in price of commodity Y
• C. The percentage change in demand of commodity X to the percentage change in demand of commodity Y
• D. The percentage change in price of commodity X to the percentage change in demand of commodity Y

Hint:

Elasticity always measures:
\[ \frac{\text{Percentage change in Effect (Quantity Demanded)}}{\text{Percentage change in Cause (Price)}} \]
For cross-price elasticity, the effect is on good X, and the cause is the price change of good Y.

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
Cross-price elasticity of demand measures how sensitive the consumer demand of one good (commodity X) is to a change in the price of another related good (commodity Y).
This helps identify whether two goods are substitutes, complements, or unrelated.
Key Formula or Approach:
The mathematical formula for the cross-price elasticity of demand ($E_{xy}$) is:
\[ E_{xy} = \frac{\% \text{ change in quantity demanded of commodity X}}{\% \text{ change in price of commodity Y}} \]

Step 2: Detailed Explanation:
The definition directly translates the mathematical ratio into words.
The numerator is the percentage change in the demand for commodity X.
The denominator is the percentage change in the price of commodity Y.
Thus, the correct option is (A).
Option (B) is incorrect because it relates price to price.
Option (C) is incorrect because it relates demand to demand.
Option (D) is incorrect because it reverses the relationship, placing price change in the numerator and demand change in the denominator.

Step 3: Final Answer:
The correct option is (A).