Multiple choice

If goods X and Y are substitutes, then

  1. cross elasticity between X and Y is zero

  2. cross elasticity between X and Y is positive

  3. cross elasticity between X and Y is one

  4. cross elasticity between X and Y is negative
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

For substitute goods, when the price of one increases, consumers buy more of the other. Cross elasticity = (% change in Qd of X) / (% change in Price of Y). Since both move in same direction (price of Y up, Qd of X up), the ratio is positive. Example: tea and coffee - if coffee price rises 10%, tea demand might increase 5%, giving positive cross elasticity of 0.5.

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