The cross-price elasticity of demand between good X and good Y is 2.75. Given this information, which of the following statements is true?
A) The demand for goods X and Y is inelastic.
B) Goods X and Y are substitutes.
C) Goods X and Y are complements.
D) The demand for goods X and Y is income inelastic.

Question

Quizplus · Accepted Answer

A positive cross-price elasticity of demand, such as 2.75, indicates that as the price of one good increases, the demand for the other good also increases. This relationship is characteristic of substitute goods, hence goods X and Y are substitutes.

The Cross-Price Elasticity of Demand Between Good X and Good