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Coffee and sugar are complement goods, according to the source's example. What sign does their cross-price elasticity of demand have, and what happens to sugar demand if coffee prices rise?
AZero; coffee prices have no effect on sugar demand
BNegative; a higher coffee price means a lower quantity of sugar consumed
CPositive; a higher coffee price means a greater quantity of sugar consumed
DNegative; a higher coffee price means a greater quantity of sugar consumed
Answer & Solution
Correct answer: B. Negative; a higher coffee price means a lower quantity of sugar consumed
1. Coffee and sugar are given as an example of complement goods, ones that tend to be used together.
2. Complement goods have a negative cross-price elasticity of demand.
3. If coffee becomes more expensive, people buy less coffee, and so also buy less sugar to go with it.
4. A positive cross-price elasticity instead describes substitute goods, not complements like these.
_Source: OpenStax Principles of Microeconomics for AP Courses (CC BY 4.0), Ch 5 "Elasticity", section 5.4 | Elasticity in Areas Other Than Price_
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