Question : Assertion: Cross elasticity of demand is positive when two goods are substitutes.

Reason: Substitutes are alternative goods that can be used in place of each other, so an increase in the price of one leads to an increase in demand for the other.

Option 1: Both the assertion and reason are correct and related.

Option 2: Both the assertion and reason are correct but not related.

Option 3: The assertion is correct, but the reason is incorrect.

Option 4: The assertion is incorrect, but the reason is correct.

Correct Answer: Both the assertion and reason are correct and related.

Solution : The correct answer is (A) Both the assertion and reason are correct and related.

The assertion states that the cross elasticity of demand is positive when two goods are substitutes. This is correct. Cross elasticity of demand measures the responsiveness of the quantity demanded of one good to changes in the price of another good. When two goods are substitutes, an increase in the price of one good typically leads to an increase in the demand for the other good. This positive relationship indicates a positive cross elasticity of demand.

The reason provided states that substitutes are alternative goods that can be used in place of each other, so an increase in the price of one leads to an increase in demand for the other. This reason supports the assertion. When the price of one substitute good increases, consumers tend to switch their demand towards the other substitute good, resulting in an increase in its demand. This behavior is a direct consequence of the availability of substitutes, where consumers can easily substitute one good for another.

Therefore, both the assertion and reason are correct and related. The positive cross elasticity of demand is observed when two goods are substitutes, as stated in the assertion, and the reason explains the relationship between substitutes and the increase in demand for one good when the price of the other increases.