If the cross elasticity of demand between two goods is zero, the goods are

• A. substitutes.
• B. complements.
• C. unrelated.
• D. identical.

Answer: (C)

Cross elasticity of demand shows how the quantity demanded of one good responds to a price change in another good. If that elasticity is zero, a price change for one good does not affect the quantity demanded of the other, so the two goods do not influence each other — they are unrelated. If they were substitutes, the cross elasticity would be positive, meaning people switch to the other good when one becomes more expensive. If they were complements, the cross elasticity would be negative, so one price rise would reduce demand for the other. If they were identical, the response would be very strong or undefined, since they’re essentially the same product rather than unrelated goods.