Question

Studies have shown that if the price of natural gas increases, people use more coal to...

Studies have shown that if the price of natural gas increases, people use more coal to heat their homes. Given this information, which of the following statement is true regarding the cross-price elasticity (Ec) between the two?

Ec>0, natural gas and coal are substitutes.

Ec<0, natural gas and coal are substitutes.

Ec<0, natural gas and coal are complements.

Ec>0, natural gas and coals are complements.
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Homework Answers

Answer #1

For answering this question we need to understand the concept of cross price elasticity of demand

Cross price elasticity of demand is the ratio of percentage change of quantity demanded of good a to the percentage change of price of good b

If the value of cross price elasticity of demand is positive then the two goods are substitute for each other

If the value is negative then the two goods are complements to each other

In the given question it can be clearly seen that natural gas and coal are substitute to each other It means coal can replace natural gas if price of natural gas rises

So the value of cross price elasticity of demand will be greater than zero and they are substitutes

Answer is option A

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