3.

When the cost of dough-making machines fell by 10 percent, the demand for
bakers fell by 15 percent. What is the cross-wage elasticity of demand for
bakers? Are bakers and dough-making machines gross substitute or gross
complements?

Gross compliments (substitutes) are inputs in the production process for which the
substitution effect is less (greater) than the scale effect. Thus a decrease in the cost of one
leads to an increase (decrease) in the demand for the other. Cross elasticity of demand =
% change demanded for assistant bakers / % change in cost of doughmaking machines.
15% / 10% = 1.5. Since the coefficient is greater than zero, these are gross substitutes.