ECONOMICS
ELASTICITY OF DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The demands for A and B are both price elastic.
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A and B are complements.
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A and B are substitutes.
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The demands for A and B are both price inelastic.
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Detailed explanation-1: -A positive cross elasticity of demand means that the demand for good A will increase as the price of good B goes up. This means that goods A and B are good substitutes.
Detailed explanation-2: -We determine whether goods are complements or substitutes based on cross price elasticity-if the cross price elasticity is positive the goods are substitutes, and if the cross price elasticity are negative the goods are complements.
Detailed explanation-3: -A negative cross elasticity denotes two products that are complements, while a positive cross elasticity denotes two products are substitutes. If products A and B are complements, an increase in the price of B leads to a decrease in the quantity demanded for A, as A is used in conjunction with B.
Detailed explanation-4: -A positive cross-price elasticity of demand between two products exhibits that the products are substitutes.