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

• A. Inferior goods.
• B. Complements.
• C. Substitutes.
• D. Normal goods.

Answer: (C)

Cross elasticity of demand shows how the quantity demanded of one good changes when the price of another good changes. The sign matters: a positive cross elasticity means the goods are substitutes, a negative one means they are complements, and zero means they are independent. If the cross elasticity is positive, a rise in the price of one good makes people switch to the other, increasing its quantity demanded. So the two goods are substitutes. For example, if coffee becomes more expensive, people buy more tea instead. This reflects substitutability, not income effects—income changes determine inferior vs normal goods, while cross elasticity tracks how demand for one good responds to the price of another.