If the cross elasticity of demand for potato chips and pretzels equals 1.5,
A)potato chips and pretzels must both be luxury goods.
B)either potato chips or pretzels must be a luxury good, and both may be luxury goods.
C)potato chips and pretzels must be substitutes.
D)potato chips and pretzels must be complements.

Question

Quizplus · Accepted Answer

A cross elasticity of demand of 1.5 means that a 1% increase in the price of one good (potato chips or pretzels) will lead to a 1.5% increase in the quantity demanded of the other good. This suggests that potato chips and pretzels are substitutes, as an increase in the price of one good leads to an increase in the demand for the other good as consumers switch from one to the other. Luxury goods and complements do not have such a relationship in demand.

If the Cross Elasticity of Demand for Potato Chips and Pretzels