The cross elasticity of demand between apples and oranges is defined as:

• A. the price elasticity of demand for apples divided by the price elasticity of demand for oranges.
• B. the change in the quantity of apples demanded divided by the change in the quantity of oranges demanded.
• C. the percentage change in the quantity of apples demanded divided by the percentage change in the price of oranges.
• D. the percentage change in the price of oranges divided by the percentage change in the quantity of apples demanded.

Answer: (C)

Cross elasticity of demand shows how much the quantity demanded of one good responds to a price change in another good. It is defined as the percent change in the quantity demanded of the first good divided by the percent change in the price of the second good. For apples and oranges, you measure how much apples demanded changes when the price of oranges changes. If the result is positive, the goods are substitutes; if negative, they are complements; if zero, they are independent. The correct form uses the percent change in the quantity of apples demanded in the numerator and the percent change in the price of oranges in the denominator. The other forms mix up the variables or use changes in quantities rather than prices, which doesn’t capture the reaction to a price move in the other good. For example, if apples demand rises 6% when the price of oranges rises 3%, the cross elasticity is 2, indicating a relatively strong substitution effect.