Question

If goods X and Y are substitute goods, then the cross-price elasticity of the price of good Y on the demand

for good X is:

Select one:

a. positive

b. zero

c. undefined

d. negative

Answer 1

If good X and Y are substitute to each other, cross price elasticity between them must be positive because increase in price of Y (positive change) leads to increase in demand of X (positive change) and vice versa because consumers look for cheaper alternative available (good X) when price of a good rises (good Y).

Cross price elasticity is calculated as: %change in quantity demanded of X / %change in price of Y

Positive change / Positive change leads to positive cross price elasticity of demand.

Option A is correct.