The cross-price elasticity of electricity with respect to the price of natural gas has been estimated as being equal to 0.2.This implies that:
A)natural gas and electricity are both normal goods.
B)electricity and natural gas are complements.
C)electricity and natural gas are substitutes.
D)one of the two goods is inferior and the other is normal,but we need additional information to determine which of them is normal.

Question

Quizplus · Accepted Answer

A positive cross-price elasticity indicates that the goods are substitutes. As the elasticity is low (0.2), the substitution effect is weak, meaning that customers are not highly responsive to changes in the price of natural gas when it comes to their demand for electricity.

The Cross-Price Elasticity of Electricity with Respect to the Price