Below, you are provided with the value of the cross price elasticity of demand between two goods. You will use this information to identify the percentage change in the quantity demanded for that good that arises from a particular percentage price change of another related good. You will also identify whether the related good is a substitute or complement. Part 1: Complete the statement below. The cross price elasticity of demand captures the percent change in the (quantity demanded, price) of one good that results from a percent change in the (quantity demanded, price) of a related good. Suppose that economists calculate the cross price elasticity of demand between milk and orange juice to be -0.3 for milk.
Part 2: When the price of orange juice increases by 5%, by what percentage does the quantity demanded of milk change? Is this an increase or a decrease?
Part 3: When the price of orange juice decreases by 10%, by what percentage does the quantity demanded of milk change? Is this an increase or a decrease?
Part 4: Based on your answers above, are milk and orange juice substitutes or complements?
Part 5: Complete the statement below. When the cross price elasticity of demand between two goods is positive, the goods must be (substitutes, complements). When the cross price elasticity of demand between two goods is negative, the goods must be (substitutes, complements).