alleryIf two goods are perfect substitutes for each other, the cross-price elasticity of demand between them is:
AA small positive number
BExactly zero
CEqual to minus one
DInfinite
Answer & Solution
Correct answer: D. Infinite
1. For substitutes, cross elasticity is positive, and its size shows how close the substitution is.
2. Close substitutes give a large positive value; weak substitutes give a small positive value.
3. Perfect substitutes are the extreme limiting case.
4. So the cross elasticity between perfect substitutes is infinite.
_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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