What does a negative cross elasticity of demand suggest?

What does a negative cross elasticity of demand suggest?

• A. Two goods are substitutes
• B. Two goods are unrelated
• C. Two goods are complements
• D. Demand is inelastic

Answer: (C)

A negative cross elasticity of demand indicates that when the price of one good decreases, the quantity demanded of another good also increases. This relationship typically signifies that the two goods are complements, meaning they are often consumed together. For example, if the price of coffee falls, more people will likely buy coffee, which in turn increases the demand for sugar, a common complement. In contrast, a positive cross elasticity of demand would suggest that the goods are substitutes; if one good's price rises, consumers might purchase more of the other good instead. An absence of or an insignificant cross elasticity implies the goods are unrelated. Demand being inelastic pertains to how quantity demanded responds to price changes for a single good and does not address the relationship between two different goods. Therefore, a negative cross elasticity of demand distinctly highlights a complementary relationship.

A negative cross elasticity of demand indicates that when the price of one good decreases, the quantity demanded of another good also increases. This relationship typically signifies that the two goods are complements, meaning they are often consumed together. For example, if the price of coffee falls, more people will likely buy coffee, which in turn increases the demand for sugar, a common complement.

In contrast, a positive cross elasticity of demand would suggest that the goods are substitutes; if one good's price rises, consumers might purchase more of the other good instead. An absence of or an insignificant cross elasticity implies the goods are unrelated. Demand being inelastic pertains to how quantity demanded responds to price changes for a single good and does not address the relationship between two different goods. Therefore, a negative cross elasticity of demand distinctly highlights a complementary relationship.