Whether a cross-price elasticity of demand is positive or negative indicates whether the:
A) goods are substitutes or complements.
B) elasticities are reported in absolute value.
C) demands are elastic or inelastic.
D) goods are a luxury or a necessity.

Question

Quizplus · Accepted Answer

A positive cross-price elasticity of demand indicates that the goods are substitutes, meaning that an increase in the price of one good leads to an increase in the demand for the other good, while a negative cross-price elasticity of demand indicates that the goods are complements, meaning that an increase in the price of one good leads to a decrease in the demand for the other good. The other options (B, C, and D) are not relevant to determining whether the cross-price elasticity of demand is positive or negative.

Whether a Cross-Price Elasticity of Demand Is Positive or Negative