1) a) Are hybrids and gasoline complements or substitutes? b) Are sport-utility

Question

1)

a) Are hybrids and gasoline complements or substitutes?

b) Are sport-utility vehicles and gasoline complements or substitutes?

      Using the signs of the cross-price elasticities give intuitive explanations.

 

 

I am having a lot of problems solving these question anyone can explain how can i start off i don't quite understand how to do this.

Thank you

1) a) Are hybrids and gasoline complements or substitutes? b) Are sport-utility vehicles and gasoline complements or substitutes? Using the signs of the cross-price elasticities give intuitive explanations. I am having a lot of problems solving these question anyone can explain how can i start off i don't quite understand how to do this.

Explanation / Answer

It's mostly a definition thing. A negative price elasticity indicates complements. A positive price elasticity indicates substitutes. The reason is fairly simple: assume products A and B are complements. An increase in the demand for A is caused by an increase in the quantity demanded for B. Therefore, if the price of product B decreases, then the demand curve for product A shifts to the right, increasing A's demand, resulting in a negative value for the cross elasticity of demand. The exact opposite reasoning holds for substitutes. So, in this example... A) Gasoline and hybrids are substitutes. B) Gasoline and SUVs are complements.

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