Cross-Price Elasticity Indicates Substitutes

Steps:

• Recall cross-price elasticity of demand (E_xy) measures percentage change in quantity demanded of good X divided by percentage change in price of good Y.
• A positive E_xy means goods X and Y are substitutes: rising price of Y increases demand for X.
• This shows quantity demanded of X responds to price changes in Y.
• Compare to options: only C matches this responsiveness of quantity to substitute prices.

Why C is correct:

• By definition, positive cross-price elasticity means quantity demanded rises when the price of a substitute increases, directly indicating sensitivity to those price changes.

Why the others are wrong:

• A: Elasticity affects quantity demanded, not the good's own price sensitivity.
• B: Elasticity links quantity demanded to prices, not prices to quantities demanded.
• D: Elasticity responds to price changes, not quantity changes in substitutes.

Final answer: C