Question

If the cross-price elasticity of demand for two goods is 1.25, then the two goods are luxuries. the two goods are substitutes. one of the goods is normal and the other good is inferior. the demand for one of the goods conforms to the law of demand, but the demand for the other good violates the law of demand. the two goods are complimentary goods

Answer 1

the two goods are substitutes

Step-by-step explanation:

When the cross-price elasticity of two goods is positive (1.25 in this case) this means that the two goods are substitute goods. That means that a price increase in one of those goods will increase the quantity demanded of the other good.

When the cross-price elasticity of two goods is negative, this means that the two goods are complementary goods. That means that a price increase in one of the goods will decrease the quantity demanded for both goods.

Answer 2

The correct answer is the two goods are substitutes.

Step-by-step explanation:

The cross elasticity of demand is 1.25. Positive cross elasticity means that when there is a change in the price of one good the quantity demanded of the other good changes in the same direction. For instance, an increase in the price of one good causes the quantity demanded of the other good to increase.

This indicates that the two goods are substitutes, when the price of a good increase, the consumer will prefer its cheaper substitute. As a result, the quantity demanded of its substitute will increase.