If two goods are perfect substitutes for each other, Cross elasticity of demand between them will be :
Infinity
For perfect substitutes the cross elasticity of demand is infinite — option 4.
The definition. Cross elasticity measures how the demand for one good responds to a change in the price of another :
\(e_{c}=\dfrac{\%\ \text{change in quantity demanded of X}}{\%\ \text{change in price of Y}}\)
What its sign and size tell you.
| Value | Relationship | Example |
|---|---|---|
| Positive | Substitutes — Y dearer, so buyers switch to X | Tea and coffee |
| Negative | Complements — Y dearer, so less of both is bought | Cars and petrol; printers and cartridges |
| Zero | Unrelated goods | Salt and shoes |
| Infinity | Perfect substitutes | Two sellers’ identical wheat in a perfectly competitive market |
Why perfect substitutes give infinity. If two goods are perfect substitutes, buyers regard them as identical and care only about price. Raise the price of Y by even a fraction and every buyer moves to X: the quantity demanded of X jumps enormously in response to an infinitesimally small price change. The numerator of the fraction is very large while the denominator tends to zero, so the ratio tends to infinity.
Why option 2 is the trap. Substitutes in general do have a positive cross elasticity, and a candidate who reads only as far as “substitutes” will stop there. The word perfect is what changes the answer: it is the limiting case of substitutability, and the elasticity takes its limiting value.
Where it is used in practice. Cross elasticity is central to defining a market in competition law: goods with a high positive cross elasticity belong in the same market and constrain one another’s prices, which is why regulators measure it before ruling on a merger or on abuse of dominance. Firms also use it to set prices across a product line and to identify which rivals actually compete with them.
Hence, the answer is Infinity.
Similar Questions
In case of cost-push inflation :
Which of the following statements are correct ?
A. Gross Domestic Product at Market Price = Gross National Product at Market Price + Net Factor Income From Abroad
B. Gross Domestic Product at factor Cost = Gross Domestic Product at Market Price – Indirect Taxes + Subsidies
C. Net Domestic Product at Market Price = Net National Product at Market Price – Net Factor Income From Abroad
D. Gross Domestic Product at Market Price = Net Domestic Product at Market Price + Depreciation
E. Net National Product at Market Price = Gross Domestic Product at Market Price + Net Factor Income From Abroad + Depreciation
Choose the correct answer from the options given below :
Match List - I with List - II.
List - I
(Term)List - II
(Description)A. Law of Diminishing Marginal Utility I. On each successive unit consumed, the utility derived goes on falling B. Consumer Surplus II. The rate at which consumer is ready to compromise goods X for another goods Y, holding the level of satisfaction constant C. Marginal Rate of Substitution III. Difference between what a consumer is ready to pay for a commodity and what he actually pays for it D. Budget Line IV. All those combinations of two goods which consumer can buy spending his given money income and their given prices. Choose the correct answer from the options given below :
Match the items of the List - I with those of the List - II and indicate the correct code :
List - I List - II (a) Positive income elasticity (i) Substitute goods (b) Negative income elasticity (ii) Complementary goods (c) Positive cross elasticity (iii) Inferior goods (d) Negative cross elasticity (iv) Superior goods Code :
Match the items of the List - I with those of List - II and suggest the correct code from the following :
List - I List - II (a) GDP (i) National income (b) GDP at factor cost (ii) NDP plus Net flow of income from abroad (c) NNP at factor cost (iii) Money value of final goods and services produced (d) NNP (iv) Total gross value added by all enterprises in the economy Code :
Who among the following is known for application of Psychology to industry and management ?
If the demand for using the Noida express way is given by :
Q = 40,000 – 2500P
Where Q is the number of users (vehicles) and P is the amount of toll collected per unit who uses the express way. In light of this information which of the following is true :
The demand function for commodity X, is \( Q_D = 300 - 20P \); where P is the price in rupees per unit and \( Q_D \) is the quantity demanded in units per period. Which of the following is the price level at which total revenue of a firm facing this demand function is maximised?
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