📚 Learning Guide
Cross Price Elasticity of Demand
medium

If the cross price elasticity of demand between two goods A and B is positive, what does this indicate about the relationship between these goods?

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Choose the Best Answer

A

They are substitutes.

B

They are complements.

C

They are unrelated.

D

They are inferior goods.

Understanding the Answer

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Answer

When the cross price elasticity of demand between two goods A and B is positive, it means that the two goods are substitutes. This means that if the price of good A goes up, people will buy more of good B instead, because they see B as a similar option. For example, if the price of coffee increases, some people might choose to drink tea instead, since both are beverages that can serve a similar purpose. This positive relationship shows how the demand for one good can be affected by the price change of another good. Essentially, when one becomes more expensive, the other becomes more attractive to consumers.

Detailed Explanation

When the cross price elasticity is positive, it means that if the price of one good goes up, people buy more of the other good. Other options are incorrect because Some might think that a positive relationship means the goods work well together; It's easy to think that a positive number means no connection.

Key Concepts

economic implications
interpretation of results
Topic

Cross Price Elasticity of Demand

Difficulty

medium level question

Cognitive Level

understand

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