This question is fairly simple in that it is little more than
an definitional question. We know that if two goods are considered
substitutes, then an increase in the price of one leads to an increase
in the quantity demanded of the other. Thus, the cross price elasticity
is positive, but we don't have enough information to know its
size.
10. If coffee and tea are substitutes, what do we know for certain
about the cross-price elasticity of demand for coffee with respect
to the price of tea?
- It is greater than 1. We must reject this answer. Since it's positive, it fits with the goods
being substitutes; however, we can't know for certain
that the cross price elasticity is greater than one.
- It is negative. This would not fit for substitutes, only for complements.
- It is positive. Correct, as explained above.
- they are both inferior goods. From the information
given, we have no way of knowing if the goods are normal, inferior or
in fact, anything about their income elasticity . However, it is unlikely that these are in general inferior
goods.
- It is equal to one. We must reject this answer. Even though it fits with the goods
being substitutes in that it is positive, we can't know for certain
that the cross price elasticity is equal to one.
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