The distinction between substitutes and complements can be made on the basis of computing the ________ elasticity of demand.
A) price
B) relative
C) income
D) absolute
E) cross

Question

Quizplus · Accepted Answer

The distinction between substitutes and complements can be made on the basis of computing the cross elasticity of demand. This measures the responsiveness of the demand for one good to a change in the price of another good. If the cross elasticity is positive, the two goods are substitutes (e.g. coffee and tea), meaning that an increase in the price of one good will lead to an increase in the demand for the other good. If the cross elasticity is negative, the two goods are complements (e.g. hot dogs and hot dog buns), meaning that an increase in the price of one good will lead to a decrease in the demand for the other good.

The Distinction Between Substitutes and Complements Can Be Made on the Basis