If a 1 per cent increase in the price of X increases the quantity demanded of Y by 2 per cent, then X and Y are
A) normal goods and the income elasticity of demand of each equals 2.
B) substitutes and the cross elasticity of demand equals 2.
C) substitutes and the cross elasticity of demand equals 1/2.
D) complements and the cross elasticity of demand equals 2.
E) complements and the income elasticity of demand equals 2.

Question

Quizplus · Accepted Answer

If a 1% increase in the price of X increases the quantity demanded of Y by 2%, then X and Y are substitutes. This is because as the price of X increases, consumers will switch to Y as a substitute. The increase in the quantity demanded of Y confirms this substitution effect. The cross elasticity of demand in this case is equal to 2, which reflects a strong relationship between the two goods. Therefore, option B is the correct choice.

If a 1 Per Cent Increase in the Price of X