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

• A. Complements
• B. Substitutes
• C. Unrelated
• D. Inferior

Answer: (B)

Cross-price elasticity of demand shows how the quantity you buy of one good responds to a price change of another good. When this elasticity is positive, the two goods are substitutes: if the price of one rises, people switch to the other, increasing its demand. For example, if coffee gets more expensive, more people buy tea.

If the elasticity were negative, the goods would be complements, meaning they’re often used together and a price increase in one lowers the demand for the other. If the elasticity were zero, the goods are unrelated and price changes in one don’t affect the other’s quantity demanded. Income-related concepts (like inferior goods) relate to how demand responds to income, not to the price of another good, so they don’t apply here.