Texas A&M University (TAMU) ECON202 Principles of Economics Practice Exam 1

When the coefficient of cross-price elasticity of demand, denoted as E xy, equals zero, it indicates that the two goods are unrelated. This means that a change in the price of one good does not affect the quantity demanded of the other good. In other words, these goods operate independently of each other in terms of consumer demand.

In the context of understanding consumer behavior, identifying unrelated goods helps economists and businesses understand market dynamics and make pricing or production decisions. Goods that are unrelated do not impact one another's market performance, which can be crucial for strategies related to promotion and inventory management.

The concepts of substitutes and complements involve changes in demand in response to price changes of related goods. Substitutes would see an increase in the demand for one good as the price of another rises, while complementary goods see a decrease in demand for one good when the price of the complement rises. However, since E xy equals zero, this dynamic does not apply, reinforcing that the goods are completely independent in terms of their market interactions. Elasticity relates more to how demand for a good changes in response to its own price, rather than the price changes of another good, thus not relevant in this context.