alleryA positive cross-price elasticity of demand between two goods indicates that the goods are:
ASubstitutes for each other
BComplements to each other
CTotally unrelated goods
DBoth inferior goods
Answer & Solution
Correct answer: A. Substitutes for each other
1. Cross elasticity equals % change in quantity of X over % change in price of Y.
2. A rise in the price of a substitute raises demand for the other good, giving a positive value.
3. Complements give a negative value, and unrelated goods give zero.
4. So a positive cross elasticity indicates the goods are substitutes.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 2 Unit I "Law of Demand and Elasticity of Demand", p.34_
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