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 the quantity demanded of one good to changes in the price of another good. It helps businesses understand the relationship between their product and other related goods in the market.
Pricing strategies for substitute goods: Cross elasticity of demand is negative for substitute goods. When the cross elasticity is negative, it means that as the price of one good increases, the quantity demanded of the other good decreases. This suggests that the goods are substitutes, and consumers can easily switch between them based on price. Businesses can use this information to adjust their pricing strategies for substitute goods, considering the price levels and demand elasticity of competing products.
On the other hand, the concept of cross elasticity of demand is not directly related to pricing strategies for luxury goods or inferior goods. Pricing strategies for luxury goods may be influenced by factors such as exclusivity, brand image, and target market preferences, while pricing strategies for inferior goods may focus on affordability and targeting price-sensitive consumers.
