Cross Elasticity of Demand measures what relationship?

Cross Elasticity of Demand is a measure of how the quantity demanded of one good responds to a change in the price of another good. This concept is essential in understanding the relationship between substitutes and complements in the market.

When two goods are substitutes, an increase in the price of one will lead to an increase in the demand for the other, resulting in a positive cross elasticity of demand. Conversely, if two goods are complements, a rise in the price of one will lead to a decrease in the demand for the other, producing a negative cross elasticity. This relationship helps businesses and economists understand how changes in market conditions or competitor pricing can affect consumer behavior and demand for related goods.

In summary, the correct answer captures the fundamental principle of how one good's demand varies in response to the price change of another good, making it an important measure in microeconomic analysis.