Suppose that the cross price elasticity of demand between goods Y and Z equals 1.5. Which of the following is TRUE?
A) Goods Y and Z are complements because the cross price elasticity is greater than one.
B) Goods Y and Z are complements because the cross price elasticity is positive.
C) Goods Y and Z are substitutes because the cross price elasticity is greater than one.
D) Goods Y and Z are substitutes because the cross price elasticity is positive.

Question

Quizplus · Accepted Answer

A positive cross price elasticity of demand between two goods implies that they are substitutes, meaning that an increase in the price of one good will lead to an increase in the quantity demanded of the other good. The fact that the cross price elasticity is greater than one simply means that the relationship is relatively strong or responsive, but it does not indicate whether the goods are complements or substitutes.

Suppose That the Cross Price Elasticity of Demand Between Goods