What does a positive cross-price elasticity signify?

What does a positive cross-price elasticity signify?

• A. The goods are complements in consumption
• B. The goods are unrelated in demand
• C. The goods are substitutes in the market
• D. The goods have fixed demand regardless of price changes

Answer: (C)

A positive cross-price elasticity signifies that as the price of one good increases, the demand for another good also increases. This relationship indicates that the two goods are substitutes in the market. When consumers face a higher price for one substitute, they are likely to purchase more of the other good as an alternative, reflecting a positive correlation between the price of one and the demand for the other. In contrast, a negative cross-price elasticity would suggest that the goods are complements, meaning that an increase in the price of one good would lead to a decrease in the demand for the other. Unrelated goods would exhibit no significant relationship in demand based on each other's price changes, which is not captured by a positive elasticity. Goods with fixed demand would not show any change in demand regardless of price adjustments, further differentiating them from those indicated by positive cross-price elasticity.

A positive cross-price elasticity signifies that as the price of one good increases, the demand for another good also increases. This relationship indicates that the two goods are substitutes in the market. When consumers face a higher price for one substitute, they are likely to purchase more of the other good as an alternative, reflecting a positive correlation between the price of one and the demand for the other.

In contrast, a negative cross-price elasticity would suggest that the goods are complements, meaning that an increase in the price of one good would lead to a decrease in the demand for the other. Unrelated goods would exhibit no significant relationship in demand based on each other's price changes, which is not captured by a positive elasticity. Goods with fixed demand would not show any change in demand regardless of price adjustments, further differentiating them from those indicated by positive cross-price elasticity.