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
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?
The conflict process usually has __________.
As per Lewin’s Three - Step Change Model, changing to overcome the pressures of both individual resistance and group conformity is termed as :
Out of the following, identify the four major functions which communication serves within a group or organisation :
(a) Control
(b) Co-ordination
(c) Emotional expression
(d) Information
(e) Motivation
(f) Organisation
Codes :
__________ is a process of system wide change, designed to make an organisation more adaptive.
Which one of the following is not an example of semantic barrier?
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 :
Important Questions from Miscellaneous
The magazine in which Mahatma Gandhi mentioned what he wanted the Constitution to do is:
Which gas shields the surface of the earth from ultraviolet radiation from the sun?
Which event is marked as an Intangible Cultural Heritage of Humanity by UNESCO?
Who has been conferred with the rank of the Commander of the Order of the British Empire in 2018?
Who directead the film ‘Bhuvan Shome’?
