Question

If the cross elasticity of demand between two goods is positive, state how the two goods are related to each other.

Answer 1

When the price of one item (Y) increases and the demand for another commodity (X) rises in response, this is known as positive cross elasticity of demand. Cross elasticity is positive when two goods can be substituted for one another because a drop in one's price reduces demand for the other. Tea and coffee, for instance, are alternatives. The quantity of tea (X) that is demanded decreases when the price of coffee (Y) declines, but the quantity of coffee is increased. As a result, changes in the quantity requested of tea and the price of coffee will have the same sign, meaning that cross elasticity is positive.