# Suppose that cross price elasticity for spinach and lettuce has been calculated to be +.4, what...

## Question:

Suppose that cross price elasticity for spinach and lettuce has been calculated to be +.4, what does this say about the relationship between spinach and lettuce? What type of goods are they? What will happen to the consumption of spinach if the price of lettuce falls up by 20%?

## Substitute Goods:

When the price of first good is positively related to the quantity demanded of the second good, these goods are known as substitute goods. The cross-price elasticity of demand between such goods is positive. For example: tea and coffee.

## Answer and Explanation: 1

The cross price elasticity for spinach and lettuce is +0.4.

Since, the cross-price elasticity is positive, it shows that both spinach and lettuce are substitute goods. It shows that an increase in the price of spinach will cause an increase in the quantity demanded of lettuce and vice-versa.

If the price of spinach falls by 20%, the quantity demanded of lettuce will fall by:

{eq}\begin{align*} e &= \dfrac{{\% \Delta {Q_L}}}{{\% \Delta {P_S}}}\\ 0.4 &= - \dfrac{{\% \Delta {Q_L}}}{{20}}\\ \% \Delta {Q_L} &= - 8 \end{align*} {/eq}

So, the quantity demanded of lettuce will fall by 8%.

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Chapter 8 / Lesson 13Understand what substitute goods are by learning the substitute goods definition. Discover some examples of substitute products. Understand the substitution effect.

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