Question : The concept of cross elasticity of demand is useful for businesses to determine:
Option 1: Pricing strategies for complementary goods.
Option 2: Pricing strategies for substitute goods.
Option 3: Pricing strategies for luxury goods.
Option 4: Pricing strategies for inferior goods.
Correct Answer: Pricing strategies for substitute goods.
Solution : The correct answer is (b) pricing strategies for substitute goods.
Cross elasticity of demand measures the responsiveness of quantity demanded of one good to changes in the price of another good. It helps businesses understand how the demand for their product is influenced by changes in the price of related goods. In particular, when the cross elasticity of demand between two goods is positive, it indicates that they are substitute goods. This means that an increase in the price of one good will lead consumers to demand more of the other good, and vice versa.
By knowing the cross elasticity of demand for their product with substitute goods, businesses can make informed decisions about their pricing strategies. They can assess how changes in the price of substitute goods may affect the demand for their product and adjust their pricing accordingly to remain competitive in the market.
