Question

Are the following pairs of goods substitutes or complements? Indicate whether their cross-price elasticities are negative or positive. a. Bread and butter b. Bread and potatoes c. Socks and shoes d. Tennis rackets and golf clubs e. Bicycles and automobiles f. Foreign investments and domestic investments g. Cars made in Japan and cars made in the United States

Short answer

Question: Determine whether the pairs of goods are substitutes or complements and the sign of their cross-price elasticities. a. Bread and butter b. Bread and potatoes c. Socks and shoes d. Tennis rackets and golf clubs e. Bicycles and automobiles f. Foreign investments and domestic investments g. Cars made in Japan and cars made in the United States Answer: a. Complements, negative cross-price elasticity b. Substitutes, positive cross-price elasticity c. Complements, negative cross-price elasticity d. Substitutes, positive cross-price elasticity e. Substitutes, positive cross-price elasticity f. Substitutes, positive cross-price elasticity g. Substitutes, positive cross-price elasticity

Step-by-step solution

Understanding Substitutes and Complements

Substitute goods are goods that can replace each other, so when the price of one good increases, the demand for the substitute good also increases. Complementary goods are goods that are used together, so when the price of one good increases, the demand for the complementary good decreases.

Understanding Cross-price Elasticity

Cross-price elasticity measures the responsiveness of demand for a good to changes in the price of another good. It is calculated as the percent change in demand of one good divided by the percent change in price of another good. If the cross-price elasticity is positive, it means the goods are substitutes, and if it is negative, it means the goods are complements.

Analyzing the Pairs of Goods

a. Bread and butter: These goods are complements because they are typically consumed together. The cross-price elasticity would be negative. b. Bread and potatoes: These goods are substitutes since they can both be consumed as staple carbohydrates in a meal. The cross-price elasticity would be positive. c. Socks and shoes: These goods are complements because they are typically used together. The cross-price elasticity would be negative. d. Tennis rackets and golf clubs: These goods are substitutes because they are both leisure sports equipment and can replace each other in the interest of a user. The cross-price elasticity would be positive. e. Bicycles and automobiles: These goods are substitutes as they both serve as forms of transportation. The cross-price elasticity would be positive. f. Foreign investments and domestic investments: These goods are substitutes since they are both types of investments, and investors may choose to invest in one market instead of another. The cross-price elasticity would be positive. g. Cars made in Japan and cars made in the United States: These goods are substitutes because they are both types of automobiles, and consumers may choose between Japanese and American cars based on price or other factors. The cross-price elasticity would be positive.