Question

The smaller the positive cross elasticity coefficient, the greater is the substitutability between two products.

a) true
b) false

Answer 1

The statement is false. A smaller positive cross elasticity coefficient indicates less substitutability between two products.

Step-by-step explanation:

The statement is false. The cross elasticity of demand measures how the quantity demanded of one product changes in response to a change in the price of another product.

For substitute goods, such as coffee and tea, a higher price for one product will lead to a decrease in the quantity consumed of the other product, indicating positive cross elasticity. Therefore, a smaller positive cross elasticity coefficient indicates less substitutability between two products.