Upper A
9
percent increase in the price of digital apps reduces the amount of tablet devices demanded by 5
percent.
The cross price elasticity of demand is - 0.56.
The cross price elasticity of demand indicates that tablet devices and digital apps are
a. substitutes
b. complements
c. unrelated goods
b. complements
To determine whether tablet devices and digital apps are substitutes, complements, or unrelated goods, we need to analyze the cross price elasticity of demand, which measures the responsiveness of the quantity demanded of one good to a change in the price of another good.
In this case, the cross price elasticity of demand is given as -0.56. The negative sign indicates an inverse relationship between the price of digital apps and the quantity demanded of tablet devices.
To interpret the magnitude, a cross price elasticity of demand between -1 and 0 suggests that the two goods are substitutes, meaning that an increase in the price of one leads to a decrease in the quantity demanded of the other.
Therefore, based on the given cross price elasticity of -0.56, we can conclude that tablet devices and digital apps are substitutes.
The cross price elasticity of demand measures the responsiveness of the quantity demanded of one good to a change in the price of another good. In this case, the cross price elasticity of demand between tablet devices and digital apps is -0.56.
Since the cross price elasticity is negative, it suggests an inverse relationship between the two goods. When the price of digital apps increases by 9%, the quantity demanded of tablet devices reduces by 5%. This indicates that tablet devices and digital apps are substitutes.
Therefore, the correct answer is a. substitutes.