Question:
What is the sign of cross-price elasticity of demand for substituting commodities?
What is the sign of cross-price elasticity of demand for substituting commodities?
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Remember the signs for cross-price elasticity:
Substitute goods \(\rightarrow\) Positive sign (\(E_{xy} > 0\)).
Complementary goods \(\rightarrow\) Negative sign (\(E_{xy} < 0\)).
Unrelated goods \(\rightarrow\) Zero (\(E_{xy} = 0\)).
Substitute goods \(\rightarrow\) Positive sign (\(E_{xy} > 0\)).
Complementary goods \(\rightarrow\) Negative sign (\(E_{xy} < 0\)).
Unrelated goods \(\rightarrow\) Zero (\(E_{xy} = 0\)).
Updated On: Aug 5, 2026
- Negative
- Positive
- No sign (absolute value)
- Both signs (may be positive or negative)
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The Correct Option is B
Solution and Explanation
Step 1: Understanding the Concept:
This question tests cross-price elasticity of demand, which measures the percentage change in the quantity demanded of one good in response to a percentage change in the price of another good.
Step 3: Detailed Explanation:
The formula for cross-price elasticity of demand (\(E_{xy}\)) is:
\[ E_{xy} = \frac{\% \text{ Change in Quantity Demanded of Good } X}{\% \text{ Change in Price of Good } Y} \] Let us consider the relationship between substitute goods:
- Substitute goods are products that can satisfy the same consumer need (e.g., tea and coffee, or apples and pears).
- If the price of Good \(Y\) (coffee) increases, it becomes relatively more expensive.
- Consequently, consumers will reduce their consumption of coffee and switch to Good \(X\) (tea), which is now relatively cheaper, even though the price of tea remained the same.
- This causes the demand for Good \(X\) to increase.
Since both the price change of Good \(Y\) (\(+\)) and the demand change of Good \(X\) (\(+\)) move in the same direction, the ratio is positive.
Therefore, the cross-price elasticity of demand for substituting commodities is always positive.
Step 4: Final Answer:
The cross-price elasticity of substituting commodities is positive.
Therefore, the correct choice is Option (B).
This question tests cross-price elasticity of demand, which measures the percentage change in the quantity demanded of one good in response to a percentage change in the price of another good.
Step 3: Detailed Explanation:
The formula for cross-price elasticity of demand (\(E_{xy}\)) is:
\[ E_{xy} = \frac{\% \text{ Change in Quantity Demanded of Good } X}{\% \text{ Change in Price of Good } Y} \] Let us consider the relationship between substitute goods:
- Substitute goods are products that can satisfy the same consumer need (e.g., tea and coffee, or apples and pears).
- If the price of Good \(Y\) (coffee) increases, it becomes relatively more expensive.
- Consequently, consumers will reduce their consumption of coffee and switch to Good \(X\) (tea), which is now relatively cheaper, even though the price of tea remained the same.
- This causes the demand for Good \(X\) to increase.
Since both the price change of Good \(Y\) (\(+\)) and the demand change of Good \(X\) (\(+\)) move in the same direction, the ratio is positive.
Therefore, the cross-price elasticity of demand for substituting commodities is always positive.
Step 4: Final Answer:
The cross-price elasticity of substituting commodities is positive.
Therefore, the correct choice is Option (B).
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