Question 21

Substitutes have a positive cross-price elasticity.

When the price of one good increases, the demand for a substitute good also increases, indicating a positive cross-price elasticity. This relationship exemplifies how consumers will shift their preferences towards alternatives when faced with higher prices for a particular item.

A) Shortage goods

Shortage goods refer to items that are not available in sufficient quantities at a given price. Their classification does not inherently relate to cross-price elasticity, as this concept primarily concerns the relationship between the prices and demands of different goods, rather than the availability of goods.

B) Substitutes

Substitutes are goods that can replace each other in consumption. When the price of one substitute good rises, consumers are likely to purchase more of the other substitute, leading to a positive cross-price elasticity. This indicates that the demand for substitutes moves in the same direction as the price change of the original good.

C) Complements

Complements are goods that are consumed together, such as coffee and sugar. When the price of one complement increases, the demand for the other typically decreases, resulting in a negative cross-price elasticity. Thus, complements do not exhibit positive cross-price elasticity as their demand reacts oppositely to price changes.

D) Normal goods

Normal goods are those for which demand increases as consumer income rises. While they can exhibit positive income elasticity, this concept does not directly relate to cross-price elasticity, which is specifically about the relationship between the prices of different goods.

Conclusion

Substitutes are the only category among the choices that demonstrate a positive cross-price elasticity, as their demand increases when the price of a related good rises. Other options, such as complements and normal goods, do not exhibit this characteristic, thus reinforcing that substitutes are the correct answer in the context of cross-price elasticity.