0
$\begingroup$

Is the cross price elasticity of demand between two goods always lower in magnitude than the price elasticities of demand of each good?

$\endgroup$
3
$\begingroup$

Not necessarily.

For example if the utility function is $U=\min\{x,y\}$, then the demand function for x is given by $D=\frac{M}{P_x+P_y}$.

The own price elasticity of demand for x is: $-\frac{M}{(P_x+P_y)^2} \frac{P_x}{x}$.

The cross price elasticity of demand for x is: $-\frac{M}{(P_x+P_y)^2} \frac{P_y}{x}$.

If these elasticities are evaluated at $P_x=P_y=p$, then for any value of x, you have the same elasticities.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.