Changes

1. Suppose the cross elasticity of demand for goods A and B is +3.8, and for goods X and Y is -2.7. What can you conclude about the relationship of the goods A and B, and of X and Y (i.e., are they substitutes or complements)?

 

1. Suppose the cross elasticity of demand for [[goods]] A and B is +3.8, and for goods X and Y is -2.7. What can you conclude about the relationship of the goods A and B, and of X and Y (i.e., are they substitutes or complements)?

:The positive cross-elasticity for goods A and B mean that as the price of one good increases (and thus its demand decreases), then the demand for the other good increases.  '''''A and B must be substitutes because the demand for one good increases as the demand for the other good decreases'''''.  The negative cross-elasticity for goods X and Y mean that as the price of one good increases (and thus its demand decreases), then the demand for the other good decreases.  '''''X and Y must be complements because the demand for one good increases as the demand for the other good increases'''''.

:The positive cross-elasticity for goods A and B mean that as the price of one good increases (and thus its demand decreases), then the demand for the other good increases.  '''''A and B must be substitutes because the demand for one good increases as the demand for the other good decreases'''''.  The negative cross-elasticity for goods X and Y mean that as the price of one good increases (and thus its demand decreases), then the demand for the other good decreases.  '''''X and Y must be complements because the demand for one good increases as the demand for the other good increases'''''.

:The Coase theorem says that transaction costs interfere with efficient levels of activity.  When there are no transaction costs, then the free market attains the optimal use of a resource no matter who owns it. If transaction costs exist, then they impede the ability of people to deal with each other for the optimal result. Government regulations increase transaction costs, and thus are bad for the economy.

:The Coase theorem says that transaction costs interfere with efficient levels of activity.  When there are no transaction costs, then the free market attains the optimal use of a resource no matter who owns it. If transaction costs exist, then they impede the ability of people to deal with each other for the optimal result. Government regulations increase transaction costs, and thus are bad for the economy.