We should expect the cross price elasticity of butter and margarine to be
Part 2
A.
positive since they are complements.
B.
positive since they are substitutes.
C.
negative since they are complements.
D.
negative since they are substitutes.
C. negative since they are complements.
To determine the correct answer, we need to understand the concept of cross price elasticity and the relationship between butter and margarine.
Cross price elasticity measures the responsiveness of the quantity demanded for one good to a change in the price of another good. It helps determine whether two goods are substitutes or complements.
In the given case, we are comparing butter and margarine.
If butter and margarine are complements, it means that they are typically used together. For example, if people often use butter to spread on toast and margarine as an alternative, then an increase in the price of butter would likely lead to a decrease in the quantity demanded for margarine, and vice versa. Therefore, if butter and margarine are complements, we should expect a negative cross price elasticity.
On the other hand, if butter and margarine are substitutes, it means that they can be easily substituted for each other. For example, if people view butter and margarine as interchangeable for spreading on toast, then an increase in the price of butter may lead consumers to switch to margarine, resulting in an increase in the quantity demanded for margarine, and vice versa. In this case, we would expect a positive cross price elasticity.
Now, looking at the given answer choices:
A. Positive since they are complements.
B. Positive since they are substitutes.
C. Negative since they are complements.
D. Negative since they are substitutes.
Based on the explanation provided, the correct answer would be D. Negative since they are substitutes.
To determine whether the cross price elasticity of butter and margarine is positive or negative, we need to analyze whether they are complements or substitutes.
Complements are products that are consumed together, meaning that an increase in the price of one product will lead to a decrease in the demand for the other product. Substitutes, on the other hand, are products that can be used interchangeably, meaning that an increase in the price of one product will lead to an increase in the demand for the other product.
In this case, butter and margarine are typically considered substitutes. When the price of butter increases, consumers are likely to switch to margarine as a cheaper alternative. Conversely, when the price of margarine increases, consumers may switch to butter instead.
Therefore, we should expect the cross price elasticity of butter and margarine to be:
B. positive since they are substitutes.