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. When the cross elasticity of demand between two goods is positive, it indicates that they are substitutes, meaning that consumers view them as interchangeable to some extent. In this case, businesses can use the information about the cross elasticity of demand to determine their pricing strategies for substitute goods. For example, if the price of one substitute good increases, businesses may consider adjusting their prices to attract consumers who may be more willing to switch to their product.
