If two goods A and B are substitutes, cross elasticity is:

If two goods A and B are substitutes, cross elasticity is:

• A. negative.
• B. zero.
• C. positive.
• D. determined by income effect.

Answer: (C)

Cross-price elasticity of demand shows how the quantity demanded of one good changes when the price of another good changes. Its sign reveals how closely the two goods are related: positive for substitutes, negative for complements, and zero when they’re unrelated. For substitutes, a rise in the price of one good makes buyers switch to the other, increasing its quantity demanded. That's why the cross-price elasticity is positive. For example, if the price of coffee goes up, people may buy more tea, boosting tea’s demand. The other options would imply a different relationship or no relationship, or they misattribute the effect to income rather than substitution.

Cross-price elasticity of demand shows how the quantity demanded of one good changes when the price of another good changes. Its sign reveals how closely the two goods are related: positive for substitutes, negative for complements, and zero when they’re unrelated. For substitutes, a rise in the price of one good makes buyers switch to the other, increasing its quantity demanded. That's why the cross-price elasticity is positive. For example, if the price of coffee goes up, people may buy more tea, boosting tea’s demand. The other options would imply a different relationship or no relationship, or they misattribute the effect to income rather than substitution.