Question

Suppose that when the price of toy cars increases by 10 percent, Theresa buys 5 percent fewer toy cars and 4 percent less of a different toy, blocks. Calculate the cross-price elasticity for toy cars and blocks and indicate if it is positive or negative.

Answer 1

Cross-price elasticity of demand for blocks with respect to the price of toy cars:

%ΔQ_blocks / %ΔP_cars = (−4%) / (+10%) = −0.4

The cross-price elasticity is −0.4 (negative), so toy cars and blocks are complements.
(For reference, the own-price elasticity of toy cars is (−5%)/(+10%) = −0.5.)