Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It indicates that an increase in the price of one product will lead to a decrease in demand for a substitute product.
B
It shows that a decrease in price of one product will lead to an increase in demand for a complementary product.
C
It implies that businesses can increase the price of a product without affecting the demand for its substitute.
D
It suggests that the cross price elasticity is always negative, regardless of the relationship between the products.
Understanding the Answer
Let's break down why this is correct
Answer
Cross price elasticity of demand measures how the quantity demanded of one product changes when the price of a different product changes. If two products are substitutes, an increase in the price of one may lead to an increase in the demand for the other. For example, if the price of coffee rises, more people might buy tea instead, indicating a positive cross price elasticity. Businesses can use this information to set competitive prices: if they know their product is a substitute, they might lower prices to attract customers. Understanding this relationship helps businesses anticipate market changes and make informed pricing decisions.
Detailed Explanation
When the price of one product goes up, people might buy less of it. Other options are incorrect because This answer confuses substitutes with complements; This answer suggests that raising a price won't affect similar products.
Key Concepts
cross price elasticity definition
business pricing strategies
economic implications
Topic
Cross Price Elasticity of Demand
Difficulty
hard level question
Cognitive Level
understand
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