The cross elasticity of demand measures the responsiveness of the quantity demanded of a particular good to changes in the prices of:

• A. its complements but not its substitutes.
• B. its substitutes but not its complements.
• C. its substitutes and its complements.
• D. neither its substitutes nor its complements.

Answer: (C)

Cross-price elasticity of demand measures how much the quantity demanded of one good responds to a change in the price of another good. This captures both substitutes and complements: if the other good is a substitute, a rise in its price tends to raise demand for the first good (positive elasticity); if the other good is a complement, a rise in its price lowers the demand for the first good (negative elasticity). Because it reflects responsiveness to price changes of related goods, it covers both substitutes and complements. If the two goods are unrelated, the cross-price elasticity is zero.