If two goods A and B are complements, cross elasticity is:

If two goods A and B are complements, cross elasticity is:

• A. negative.
• B. positive.
• C. zero.
• D. indeterminate.

Answer: (A)

Cross elasticity of demand measures how the quantity demanded of one good responds to a price change in another good. For complements, the sign is negative because they are used together; when the price of B rises, people buy less of B, and since A and B are typically consumed together, they also buy less of A. So the percentage change in the quantity demanded of A moves in the opposite direction to the price change of B, yielding a negative cross elasticity. If the goods were substitutes, the cross elasticity would be positive; if there’s no relationship, it would be zero. Indeterminate would occur only if the data were insufficient.

Cross elasticity of demand measures how the quantity demanded of one good responds to a price change in another good. For complements, the sign is negative because they are used together; when the price of B rises, people buy less of B, and since A and B are typically consumed together, they also buy less of A. So the percentage change in the quantity demanded of A moves in the opposite direction to the price change of B, yielding a negative cross elasticity. If the goods were substitutes, the cross elasticity would be positive; if there’s no relationship, it would be zero. Indeterminate would occur only if the data were insufficient.