📚 Learning Guide
Cross Price Elasticity of Demand
medium

If the price of good A decreases and the quantity demanded for good B increases, what can we infer about the relationship between these goods?

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Learning Path
Learning Path

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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

Let's break down why this is correct

Answer

When the price of good A decreases and the quantity demanded for good B increases, it suggests that goods A and B are substitutes. This means that when good A becomes cheaper, people might choose to buy more of it instead of good B. However, if the demand for good B also goes up, it indicates that some consumers are likely switching from good A to good B, or they are buying both because they see good B as a better value. For example, if the price of coffee (good A) drops, and more people start buying tea (good B), it shows that tea is considered a substitute for coffee. This relationship helps businesses understand how changes in pricing can affect demand for their products.

Detailed Explanation

When the price of good A goes down, people buy more of good B. Other options are incorrect because Some might think these goods are substitutes, which means they replace each other; Thinking these goods are unrelated is a mistake.

Key Concepts

Cross Price Elasticity of Demand
Substitutes and Complements
Consumer Behavior
Topic

Cross Price Elasticity of Demand

Difficulty

medium level question

Cognitive Level

understand

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