Cross-elasticity rises with perceived substitutability

Steps:

• Cross-price elasticity of demand measures the percentage change in quantity demanded of one good divided by the percentage change in price of another.
• Positive values indicate substitutes; higher values mean stronger substitution effect.
• Evaluate options based on factors influencing substitution responsiveness.
• Option D aligns with consumer perception driving substitution.

Why D is correct:

• Cross-elasticity is higher when goods are close substitutes, as defined by consumer views of similarity, leading to greater demand shift when one price changes.

Why the others are wrong:

• A: Income elasticities measure response to income changes, unrelated to cross-price effects between goods.
• B: Own-price elasticities gauge sensitivity to a good's own price, not interaction between goods.
• C: Price differences affect absolute substitution but not the elasticity coefficient, which is a relative measure.

Final answer: D