What does a positive cross-price elasticity indicate?

What does a positive cross-price elasticity indicate?

• A. A positive value indicates substitutes.
• B. A negative value indicates substitutes.
• C. A negative value indicates complements.
• D. It measures income elasticity.

Answer: (C)

Cross-price elasticity of demand shows how the quantity demanded of one good responds to a change in the price of another good. When this elasticity is positive, the two goods are substitutes: as the price of one rises, consumers switch to the other, increasing its quantity demanded. If the elasticity were negative, the goods would be complements—a higher price for one reduces the demand for the other. This measure is not about income effects, which is a separate concept. So a positive cross-price elasticity indicates substitutes.

Cross-price elasticity of demand shows how the quantity demanded of one good responds to a change in the price of another good. When this elasticity is positive, the two goods are substitutes: as the price of one rises, consumers switch to the other, increasing its quantity demanded. If the elasticity were negative, the goods would be complements—a higher price for one reduces the demand for the other. This measure is not about income effects, which is a separate concept. So a positive cross-price elasticity indicates substitutes.