If the price of tea rises and the quantity demanded of coffee rises as well, what does the cross elasticity indicate about tea and coffee?

• A. Negative; complements
• B. Zero; independent
• C. Positive; substitutes
• D. Undefined

Answer: (C)

Cross elasticity of demand shows how the quantity demanded of one good responds to a price change in another good. A positive cross elasticity means the two goods are substitutes—when the price of one goes up, people buy more of the other. Here, as the price of tea rises, the quantity demanded of coffee rises too, so the cross elasticity is positive. This indicates tea and coffee are substitutes. If they were complements, the response would be a decrease in the other good when the price of one rises; if independent, there would be little to no response; and undefined would occur in rare calculation cases.