Interpreting Cross Elasticity of Demand

Steps:

• Define cross elasticity of demand (XED) as percentage change in quantity demanded of good X divided by percentage change in price of good Y.
• Note sign: positive XED means substitutes (demand rises as price of Y rises); negative means complements.
• Assess magnitude: |XED| < 1 indicates weak relationship; |XED| > 1 indicates strong.
• Apply to options: match sign and magnitude to descriptions.

Why C is correct:

• +0.5 is positive (substitutes) and |0.5| < 1 (weak), per XED definition.

Why the others are wrong:

• A: -0.2 is negative (complements), not substitutes.
• B: -0.5 is negative (complements), not substitutes.
• D: +2 is positive (substitutes), not complements; also >1 (strong).

Final answer: C