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

• A. the demands for A and B are substitutes.
• B. the demands for A and B are both price elastic.
• C. A and B are complements.
• D. the demands for A and B are both price inelastic.

Answer: (C)

Cross elasticity of demand measures how the quantity demanded of one good responds to a price change in another good. The sign of this elasticity tells the kind of relationship between the two goods. A positive cross elasticity means that when the price of the other good goes up, the quantity demanded of the first good goes up as well, which happens when consumers substitute one good for the other. So these two goods are substitutes. If the cross elasticity were negative, they would be complements, because a higher price for one would reduce the quantity demanded of the other. If it were zero, the goods are unrelated.

Own-price elasticity or whether each good is price elastic or inelastic is a separate consideration and doesn’t determine the sign of the cross elasticity.