Question

Based on USDA estimates, the cross-price elasticity for peanut butter consumption with respect to grape jam prices is 1.5.  What does this information imply about the relationship between these two goods?

	A.	Peanut butter and grape jam are substitutes in consumption
	B.	Peanut butter and grape jam are complements in consumption
	C.	Peanut butter and grape jam have elastic demand curves
	D.	Peanut butter and grape jam are normal goods

Answer 1

Ans: A ) Peanut butter and grape jam are substitutes in consumption.

Explanation:

If the cross-price elasticity is positive ,then the two goods are called substitutes.

If the cross-price elasticity is negative ,then the two goods are called complementary.

In the above given case , the cross-price elasticity is positive ( 1. 5 ) . So Peanut butter and grape jam are substitutes in consumption.