Question : Cross elasticity of demand measures the responsiveness of the quantity demanded of one good to changes in the:
Option 1: Price of a complementary good
Option 2: Price of a substitute good
Option 3: Income of consumers
Option 4: Production cost of the good
Correct Answer: Price of a substitute good
Solution : The correct answer is (b) Price of a substitute good
Cross elasticity of demand measures the responsiveness of the quantity demanded of one good to changes in the price of a substitute good. It helps us understand how the demand for a particular good is affected by changes in the price of another good that can be used as a substitute. A positive cross elasticity of demand indicates that the goods are substitutes, meaning that an increase in the price of one good leads to an increase in the demand for the other. Conversely, a negative cross elasticity of demand indicates that the goods are complements, meaning that an increase in the price of one good leads to a decrease in the demand for the other.
