A IncomeIncome A O B 0 Income 5 o Quantity of Bo C Demanded

A IncomeIncome (A) O (B) 0 Income 5 o Quantity of Bo C) Demanded (D) Demanded Refer to the diagrams. In which case would the coefficient of cross elasticity of demand be negative O c

Solution

Cross elasticity of demand measures the change in the demand for a good caused due to change in the price of related goods(either substitutes or complements). Diagrams (A) and (B) are rejected because they show the relationship between the income and quantity demanded while we are looking for the relationship between price of one good and demand for other good.

Since cross price elasticity of demand is negative in the question, price of good one and quantity demanded of other good should move in opposite direction, i.e., if price of A increases, quantity demanded of B should decrease and vice-versa. Therefore. diagram (C) represents the negative cross-price elasticity.