If goods A and B are complements, the cross elasticity of demand between A and B is

• A. negative
• B. positive
• C. their income elasticities of demand are both less than 1
• D. their income elasticities of demand are both greater than 1

Answer: (A)

Cross elasticity of demand shows how the quantity demanded of one good responds to a price change in another good. For complements, these goods are typically consumed together. When the price of one good falls, more of it is bought, and people also buy more of its complement. So the percentage change in quantity demanded of the second good is positive, while the percentage change in the price of the first good is negative, making the ratio negative. That negative sign captures the inverse relationship between the two goods: as one becomes cheaper, the other’s demand rises. If the cross elasticity were positive, that would indicate substitutes, not complements. Income elasticities, on the other hand, measure response to income, not to the price of a related good.