Question

10) In case of substitute goods, which of the following is generally appropriate?
a. Cross price elasticity of demand < 0
b. Cross price elasticity of demand > 0
c. Cross price elasticity of demand = 0
d. Cross price elasticity of demand varies from substitute to substitute​

Answer 1

ELASTICITY OF DEMAND

Answer :-

In case of substitute goods, cross elasticity of demand is > 0.

Explanation :-

What is Elasticity of Demand?

Elasticity of demand is a percentage change in quantity demanded of a commodity in response to a given percentage change in any of its quantitative determinants.

Types of elasticity of demand :-

1. Price Elasticity of Demand
2. Income Elasticity of Demand
3. Cross Elasticity of Demand

In the words of Liebhafsky, "The cross elasticity of demand is a measure of the responsiveness of purchases of Y to change in the price of X."

In the case of substitute goods, cross elasticity of demand is positive. This means, rise in price of a commodity X, will increase the demand of Commodity Y.

Eg. :- Coca-Cola and Pepsi are substitute goods. If price of Coca-Cola rises, then people will shift to Pepsi, hence  the demand for Pepsi will be increased.

Therefore, Option (b) Cross elasticity of demand > 0 is the correct option.

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