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Cross Price Elasticity of Demand
hard

If the cross price elasticity of demand between two goods is negative, this indicates that the two goods are __________.

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Choose the Best Answer

A

Substitutes

B

Complements

C

Independent

D

Inferior goods

Understanding the Answer

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Answer

If the cross price elasticity of demand between two goods is negative, this indicates that the two goods are complements. Complements are products that are often used together, so when the price of one good decreases, the demand for the other good increases. For example, if the price of coffee goes down, people might buy more coffee and, in turn, also buy more sugar to go with it. This relationship shows that the consumption of one good is linked to the consumption of the other. Therefore, a negative cross price elasticity means that the two goods support each other's demand.

Detailed Explanation

When two goods are complements, they are used together. Other options are incorrect because Some might think substitutes are the answer; People may confuse independent goods with complements.

Key Concepts

Cross Price Elasticity of Demand
Substitutes and Complements
Consumer Behavior
Topic

Cross Price Elasticity of Demand

Difficulty

hard level question

Cognitive Level

understand

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