The cross elasticity between two goods, X and Y, is positive. From this, we can conclude that goods X and Y are:
A) substitute goods.
B) complementary goods.
C) unrelated goods.
D) inferior goods.
E) normal goods.

Question

Quizplus · Accepted Answer

A positive cross elasticity of demand indicates that the two goods are substitutes, meaning that an increase in the price of good X would lead to an increase in the quantity demanded of good Y, and vice versa. Complementary goods, on the other hand, have a negative cross elasticity of demand, meaning that an increase in the price of one good would lead to a decrease in the quantity demanded of the other good. Unrelated goods have a zero cross elasticity of demand, meaning that a change in the price of one good does not affect the quantity demanded of the other good. Inferior goods are those for which demand decreases as income increases, while normal goods are those for which demand increases as income increases. None of these definitions are relevant to determining the relationship between two goods based on their cross elasticity of demand.

The Cross Elasticity Between Two Goods, X and Y, Is