If the cross-price elasticity of demand for two goods is 1.25,then
A)the two goods are luxuries.
B)the two goods are substitutes.
C)one of the goods is normal and the other good is inferior.
D)the demand for one of the goods conforms to the law of demand,but the demand for the other good violates the law of demand.

Question

Quizplus · Accepted Answer

A cross-price elasticity of demand of 1.25 indicates that the two goods are substitutes. This is because an increase in the price of one good leads to an increase in the quantity demanded of the other good. If the goods were complements, then the cross-price elasticity of demand would be negative. If the goods were both normal or both inferior, then the cross-price elasticity of demand would be less than 1. If the goods were both luxuries, then the cross-price elasticity of demand could be greater than 1, but this would not necessarily be the case.

If the Cross-Price Elasticity of Demand for Two Goods Is