Question

Two goods, wool socks and shaved ice, have a cross price elasticity of demand equal to 0.4. Given this information, what can you tell about the nature of the relationship between these two goods?

Answer 1

0.4 cross price elasticity of demand means that there is direct effect of change of price of wool socks on the demand of shaved ice but they are not very closely related to each other.

Explanation:

Cross Price elasticity of demand is the concept in Economics which focuses on the effect of change of price of one good leading to the change of the demand of the other good, but in this matter, the other things have to kept the same which is also known as ceteris paribus.

For example when the price of coffee increases, the demand of tea will increase because the people will start preferring to have tea because of the increase in the price of coffee.