Suppose that a 10 percent increase in the price of normal good Y causes a 20 percent increase in the quantity demanded of normal good X. The coefficient of cross elasticity of demand is
A) negative, and therefore these goods are substitutes.
B) negative, and therefore these goods are complements.
C) positive, and therefore these goods are substitutes.
D) positive, and therefore these goods are complements.

Question

Quizplus · Accepted Answer

The coefficient of cross elasticity of demand measures the responsiveness of the demand for one good to a change in the price of another good. Here, when the price of good Y increases by 10%, the quantity demanded of good X increases by 20%, indicating a positive relationship between the two goods. Therefore, the coefficient of cross elasticity of demand is positive, and the goods are substitutes.

Suppose That a 10 Percent Increase in the Price of Normal