CA Foundation P4 · Chapter 2 · Question 8 of 15
The price of tea rises by 10% and, as a result, the quantity demanded of coffee rises by 6%. The cross elasticity of demand for coffee with respect to the price of tea is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) +0.6, indicating that tea and coffee are substitutes
Explanation
Cross elasticity = % change in quantity of coffee / % change in price of tea = 6 / 10 = +0.6. A positive cross elasticity means a rise in the price of one good increases demand for the other, which is the case of substitutes. 1.67 inverts the ratio.
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