Question : Statement 1: Cross elasticity of demand measures the responsiveness of quantity demanded of one good to changes in the price of another good.
Statement 2: Positive cross elasticity of demand indicates that two goods are substitutes.
Option 1: Both statements are true.
Option 2: Both statements are false.
Option 3: Statement 1 is true, and statement 2 is false.
Option 4: Statement 1 is false, and statement 2 is true.
Correct Answer: Both statements are true.
Solution : The correct answer is (A) Both statements are true.
Statement 1: Cross elasticity of demand measures the responsiveness of quantity demanded of one good to changes in the price of another good. This statement is true. Cross elasticity of demand is a measure that determines how the quantity demanded of one good changes in response to a change in the price of another good. It quantifies the relationship between two goods in terms of their demand and price changes.
Statement 2: Positive cross elasticity of demand indicates that two goods are substitutes. This statement is also true. Cross elasticity of demand can be positive, negative, or zero. When the cross elasticity of demand is positive, it indicates that the two goods are substitutes. This means that an increase in the price of one good leads to an increase in the quantity demanded of the other good.
Both statements accurately describe the concept of cross elasticity of demand and the relationship between goods and their price changes.
