ECONOMICS
ELASTICITY OF DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Substitutes
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Complements
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No relationship
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Factor Inputs
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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: -If the goods are substitutes, their cross-price elasticity of demand is going to be positive. This is because a price change of Good A and quantity demanded of Good B move in the same direction: If the price of Good A increases, the quantity demanded of Good B increases.
Detailed explanation-4: -Independent goods have a cross-price elasticity of zero: as the price of one good increases, the demand for the second good is unchanged.