Cross elasticity of demand between tea and coffee is:
Options
APositive
BNegative
CZero
DInfinity
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Theory of Demand and SupplyPYQ - Dec 2022Question 32 of 20
All Questions Correct Answer
✅ Option a — Positive
All Options:
- APositive
- BNegative
- CZero
- DInfinity
Detailed Solution & Explanation
To determine the cross elasticity of demand between tea and coffee, we need to understand the concept of cross elasticity of demand. This concept measures how the demand for one product changes in response to a change in the price of another product.
• The cross elasticity of demand is calculated as the percentage change in the quantity demanded of one product divided by the percentage change in the price of the other product.
• Tea and coffee are considered substitute goods, meaning that they can be used in place of each other to satisfy the same want or need.
• When the price of coffee increases, consumers may switch to tea as a substitute, leading to an increase in the demand for tea.
• This positive relationship between the price of coffee and the demand for tea indicates a positive cross elasticity of demand.
The correct answer is positive because tea and coffee are substitute goods, and an increase in the price of one leads to an increase in the demand for the other.
• Option B, negative, is incorrect because it would imply that tea and coffee are complementary goods, which is not the case.
• Option C, zero, is also incorrect because it would suggest that the demand for tea is unaffected by changes in the price of coffee, which is not true for substitute goods.
About This Chapter: Theory of Demand and Supply
Paper
Paper 4: Business Economics
Weightage
10%
Key Topics
Law of Demand/Supply, Elasticity, Consumer Behavior
One of the most important chapters in the entire CA Foundation Economics paper. It covers the Law of Demand, Law of Supply, Elasticity of Demand (Price, Income, and Cross), Consumer Behavior (Cardinal and Ordinal approaches), and the concept of Consumer Surplus. Understanding demand and supply curves and their shifts is essential for grasping market dynamics.
View Official ICAI SyllabusExam Strategy Tip
Master the difference between 'Change in Demand' (shift) and 'Change in Quantity Demanded' (movement). This distinction alone can secure 3-5 marks. Also practice Elasticity numerical calculations.
Key Concepts to Understand
Related Comparison Tables
More Questions from Theory of Demand and Supply
Identify the factor which generally keeps the price-elasticity of demand for a good low:
Supply is a concept:
Demand for a commodity refers to:
Contraction of demand is the result of:
All but one of the following are assumed to remain the same while drawing the demand curve for a commodity. Which one is it?
Which of the following pairs of goods is an example of substitutes?
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