Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Goods A and B are substitutes and demand for A is sensitive to price changes
B
Goods A and B are substitutes but demand for A is not sensitive to price changes
C
Goods A and B are complements and demand for A is sensitive to price changes
D
Goods A and B are complements but demand for A is not sensitive to price changes
Understanding the Answer
Let's break down why this is correct
Answer
When the cross-price elasticity of demand between two goods A and B is positive, it means that as the price of good B increases, the demand for good A also increases. This indicates that goods A and B are substitutes, meaning that if people find good B too expensive, they will buy more of good A instead. If the demand for good A is inelastic, it shows that changes in price have little effect on the quantity demanded; people will still buy it even if the price goes up. For example, if coffee (good A) has an inelastic demand and tea (good B) becomes more expensive, people might buy more coffee instead of tea, because they see coffee as a substitute. This relationship helps businesses understand how changes in the market can affect their products.
Detailed Explanation
When the cross-price elasticity is positive, it means that as the price of good A goes up, people buy more of good B. Other options are incorrect because This option suggests that demand for A is sensitive to price changes; This option claims A and B are complements, which means they are used together.
Key Concepts
cross-price elasticity of demand
implications of inelastic demand
Topic
Elasticity Formulas and Relationships
Difficulty
medium level question
Cognitive Level
understand
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