If a rise in the price of good 1 decreases the quantity of good 2 demanded:

• A. the cross elasticity of demand is negative.
• B. good 1 is an inferior good.
• C. good 2 is an inferior good.
• D. the cross elasticity of demand is positive.

Answer: (A)

Cross elasticity of demand measures how the quantity demanded of one good responds to a price change in another good. It is calculated as the percentage change in the quantity of the second good divided by the percentage change in the price of the first good. The sign reveals the relationship: a negative sign means the two goods are complements—when the price of one rises, the demand for the other falls; a positive sign means they are substitutes; and zero means they are independent.

In this scenario, a rise in the price of good 1 leads to a decrease in the quantity of good 2 demanded. That indicates the goods are consumed together, so their relationship is complementary. Hence the cross elasticity of demand is negative. This is not about whether a good is inferior (that relates to how demand responds to income), and a positive cross elasticity would indicate substitutes, not complements.