Question : Cross elasticity of demand measures the responsiveness of quantity demanded to changes in:
Option 1: Price of a substitute good.
Option 2: Price of a complementary good.
Option 3: Income.
Option 4: Both a) and b).
Correct Answer: Both a) and b).
Solution : The correct answer is (d) Both a) and b).
Cross elasticity of demand measures the degree to which the quantity demanded of one good changes in response to a change in the price of another good. It helps determine whether two goods are substitutes or complements.
If the cross elasticity of demand is positive, it indicates that the goods are substitutes, meaning that an increase in the price of one good leads to an increase in the quantity demanded of the other. If the cross elasticity of demand is negative, it indicates that the goods are complements, meaning that an increase in the price of one good leads to a decrease in the quantity demanded of the other.
Therefore, cross elasticity of demand captures the responsiveness of quantity demanded to changes in the prices of both substitute goods and complementary goods.
