Cross-price elasticity of demand for widgets and McBoover devices when McBoover price rises from $9 to $11 and widgets demand increases is

• A. 0.5
• B. 2.0
• C. -0.5
• D. -2.0

Answer: (B)

Cross-price elasticity of demand shows how the quantity demanded of one good responds to a price change of another good. It is calculated as the percentage change in the quantity of widgets demanded divided by the percentage change in the price of McBoover devices. A positive value means the goods are substitutes; a negative value means they are complements.

Here, the price of McBoover devices rises from $9 to $11. The percentage change in price is (11 − 9) / 9 = 2/9 ≈ 22.2%. Widgets demand increases, and the elasticity is 2.0, so the percentage change in widgets demanded is 2.0 × 22.2% ≈ 44.4% increase. The positive 2.0 indicates a substitutes relationship and a fairly strong substitution effect. Among the options, a positive magnitude of 2.0 best fits this outcome, whereas the other options either have the wrong sign or a smaller magnitude.