The cross-price elasticity of demand is equal to 2.5, and goods X and Y are substitutes. A 10% increase in the price of good Y results in a 25% increase in the quantity demanded of good X. The marginal revenue product of the third laborer shown in the figure is $125. The total product increased from 18 to 43 with the addition of the third laborer, and multiplying this change in output (25 units) by the price per unit of output ($5) gives the marginal revenue product of $125.

1. If a 10 percent increase in the price of good Y brings forth a 25 percent increase in the quantity
demanded for good X, then the cross-price elasticity of demand is equal to ____, and good Y and
good X are ____.
Select one:
a. 2.5; substitutes
b. 0.4; substitutes
c. unit-elastic; not related
d. 0.4; complements
e. 2.5; complements
Figure 28-7
Labor
Total Product
0
0
1
3
2
18
3
43
4
55
In Figure 28-7, assume that the resource and output markets are perfectly competitive. If the
wage rate is $60 per unit of labor and the output price is $5 a unit, the MRP of the third laborer is

2. Select one:
a. $5.
b. $125.
c. 25 units.
d. 43 units.
e. $215.
Labor Total Product
0 0
1 3
2 18
3 43
4 55
Solution
1) As we know: Cross price elasticity of demand = Percentage change in quantity of good X /
percentage change in quantity of good Y
So, we have = Cross price elasticity of demand = 25% / 10%
Cross price elasticity f demand = 2.5
As the cross price elasticity of demand is positive the two goods are substitutes.
Hence, option A is the correct answer.
2) Marginal revenue product is the change in total revenue by using one additional unit of input.

3. Here MRP = Change in total output * price of output
So, MRP of the third labor = [43