What is the elasticity for a cross-price elastic substitute good?A.Less than -1B.Between -1 and 0C.Greater than 1D.Between 0 and 1
Question
What is the elasticity for a cross-price elastic substitute good?
A. Less than -1
B. Between -1 and 0
C. Greater than 1
D. Between 0 and 1
Solution
The correct answer is C. Greater than 1.
Cross-price elasticity of demand measures the responsiveness of the quantity demanded for a good to a change in the price of another good. If two goods are substitutes, we should expect to see consumers purchase more of one good when the price of its substitute increases, which would result in a positive cross-price elasticity.
If the cross-price elasticity is greater than 1, it means that the goods are strong substitutes. This is because the percentage change in the quantity demanded of one good is greater than the percentage change in the price of the other good.
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