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If two goods are substitutes for one another, what must be true about their cross price...

If two goods are substitutes for one another, what must be true about their cross price elasticity of demand?

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Answer #1

If two goods are substitutes for one another,then their cross price elasticity of demand will be positive .

Let tea and coffee be two substitute good,then

Cross price elasticity = percentage change in quantity demanded of tea/ percentage change in price of coffee

If price of coffee increases,then people will reduce their demand for coffee and increase their demand for tea .

So,cross price elasticity for two substitute goods is positive.

If you have any doubt feel free to ask

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