📚 Learning Guide
Cross Price Elasticity of Demand
easy

Maria notices that when the price of coffee decreases, she buys more donuts. How would you classify the relationship between coffee and donuts based on this observation?

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Learning Path
Learning Path

Question & Answer
1
Understand Question
2
Review Options
3
Learn Explanation
4
Explore Topic

Choose the Best Answer

A

Substitutes

B

Complements

C

Unrelated Goods

D

Inferior Goods

Understanding the Answer

Let's break down why this is correct

Answer

Maria's observation suggests that coffee and donuts are complementary goods. This means that when the price of coffee goes down, people tend to buy more coffee and, as a result, they also buy more donuts to enjoy with it. The relationship can be explained through cross-price elasticity of demand, which measures how the quantity demanded of one good changes in response to a price change in another good. In this case, since the price of coffee decreases and leads to an increase in donut purchases, we see a negative cross-price elasticity. For example, if coffee becomes cheaper and Maria buys two more donuts for every cup of coffee she buys, this shows how the two items are linked in consumer behavior.

Detailed Explanation

When coffee gets cheaper, Maria buys more donuts. Other options are incorrect because Some might think substitutes are similar products; Unrelated goods don't affect each other.

Key Concepts

Cross Price Elasticity of Demand
Substitutes and Complements
Consumer Behavior
Topic

Cross Price Elasticity of Demand

Difficulty

easy level question

Cognitive Level

understand

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