If the cross elasticity of demand of X commodity for changes in the price of Y commodity is positive, the commodities X and Y are (a) complement (b)subsitutes (c) giffen (d) infirior goods
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1 Answer
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Cross elasticity of demand is the responsiveness of demand for one product to a change in the price of another product.
If I understand you correctly, the answer is substitutes. And, if the CED is greater than 1, it means they are close substitutes.
For example, if the price of Coca Cola increases from 50p to 60p per can, and the demand for Pepsi Cola increases from 1m to 2m per year, the CED between the two products is: +100/+20 = (+) 5
i.e. As cola increases in price, demand for cola will fall because consumers can easily switch to buying the cheaper pepsi, so demand for pepsi rises.
