Cross-price elasticity of demand measures how:

• A. the quantity supplied of a good responds to changes in the price of another good
• B. the quantity demanded of one good responds to changes in the price of another good
• C. the quantity demanded of a good responds to changes in its own price
• D. the total revenue of a firm changes when the price of its product changes

Answer: (B)

Verified step by step guidance

1. Understand that cross-price elasticity of demand measures the responsiveness of the quantity demanded of one good when the price of a different good changes.
2. Recall the formula for cross-price elasticity of demand: \[ E_{xy} = \frac{\% \text{ change in quantity demanded of good } x}{\% \text{ change in price of good } y} \]
3. Recognize that this concept helps to identify whether two goods are substitutes or complements based on the sign of the elasticity (positive for substitutes, negative for complements).
4. Distinguish cross-price elasticity from own-price elasticity, which measures the responsiveness of quantity demanded to changes in the good's own price.
5. Note that cross-price elasticity does not measure changes in quantity supplied or total revenue, so those options are incorrect.