Question : Which of the following goods is likely to have a positive cross elasticity of demand with coffee?
Option 1: Tea
Option 2: Sugar
Option 3: Milk
Option 4: Salt
Correct Answer: Tea
Solution : The correct answer is (a) Tea
Cross elasticity of demand measures the responsiveness of the quantity demanded of one good to changes in the price of another good. If the cross elasticity of demand is positive, it indicates that the two goods are substitutes, meaning that an increase in the price of one good leads to an increase in the quantity demanded of the other.
In this case, coffee and tea are often considered substitutes for each other. When the price of coffee increases, consumers may switch to consuming more tea instead, resulting in an increase in the quantity demanded of tea. Therefore, coffee and tea are likely to have a positive cross elasticity of demand, making tea the correct choice from the given options.
Goods like sugar, milk, and salt are not typically considered close substitutes for coffee, so their cross elasticity of demand with coffee is likely to be low or even negative.
