Question

1. The cross-price elasticity of demand for Organic fruit with respect to the price of non-organic fruit is 4. Which of the following is an appropriate interpretation of the relationship between organic fruit and non-organic fruit?
   1. The two goods are complements in consumption and consumers are not sensitive to prices
   2. The two goods are complements in consumption and consumers are sensitive to prices
   3. The two goods are substitutes in consumption and consumers are not sensitive to prices
   4. The two goods are substitutes in consumption and consumers are sensitive to prices

Answer 1

Cross price elasticity of demand is the relationship between two type of goods that whether they are substitutes are complements to each other

Substitutes are those good which can replace each other

For example tea and coffee

Complements are those goods which complete each other

For example bread and butter

It is expressed as the ratio of percentage change in the quantity demanded of good a to the percentage change in the price of good b

If the value of cross price elasticity of demand is positive then the two goods are said to be substitutes to each other and if the value is more positive and greater than one then they are strong substitutes and in this case the consumers are more price sensitive

Price sensitive means even there is a small change in the price can causes the customer to shift from one good to another good

In the given statement also since the value of cross price elasticity of demand is positive and greater value

Hence the correct answer here is option d