Association of Chartered Certified Accountants (ACCA) Certification Practice Test

For complementary goods, the cross elasticity of demand is typically...

1. Positive

2. Negative

3. Equal

4. Neutral

The correct answer is: Negative

For complementary goods, the cross elasticity of demand is typically negative. This occurs because complementary goods are products that are used together, meaning that when the price of one good decreases, the demand for its complement usually increases. For instance, consider the relationship between printers and ink cartridges. If the price of printers decreases, more consumers are likely to purchase printers, which will consequently lead to an increase in the demand for ink cartridges. The negative value of the cross elasticity reflects this inverse relationship: as the price of one good falls, the quantity demanded of the complementary good rises. In contrast, a positive cross elasticity of demand would indicate that the two goods are substitutes, meaning that an increase in the price of one good would lead to an increase in the quantity demanded of the other. Therefore, the negative cross elasticity is a clear indicator of the complementary nature of the goods in question.