Global-Economics-for-Managers WGU Global Economics for Managers (C211, UZC2) Question and Answers

In Global Economics for Managers , gross domestic product (GDP) is widely regarded as the single best available measure of a society’s economic well-being , making option A correct. GDP measures the total market value of all final goods and services produced within a country’s borders during a given period.

Although GDP has limitations—it does not account for income distribution, environmental degradation, or non-market activities—it remains the most comprehensive and consistent indicator of economic performance across countries and over time.

Option B is incorrect because inflation is measured by price indices such as the GDP deflator or the consumer price index (CPI), not by GDP growth. Option C is incorrect because GDP values goods and services at market prices without weighting one more heavily than the other. Option D is incorrect because GDP excludes income earned by citizens working abroad; that income is included in gross national income (GNI), not GDP.

Global Economics for Managers emphasizes that GDP is particularly useful for comparing economic output and living standards internationally, especially when adjusted for purchasing power parity.

Thus, option A correctly describes GDP.

In Global Economics for Managers , opportunity cost is defined as the lost potential from pursuing one activity at the expense of another, given the available alternatives , making option B correct. Opportunity cost reflects the value of the next best alternative that is foregone when a decision is made.

This concept is central to economic decision making because resources—such as time, capital, and labor—are scarce. Choosing one option necessarily means giving up another. Opportunity cost includes both monetary and non-monetary factors and applies to individuals, firms, and governments alike.

For firms, opportunity cost may involve using capital for one investment rather than another. For consumers, it may involve spending money on one good instead of saving it or purchasing a different good. Managers must account for opportunity costs to make efficient and rational decisions.

Option A refers only to explicit costs, which are incomplete. Options C and D describe different cost and benefit concepts.

Thus, option B correctly defines opportunity cost.

In Global Economics for Managers , the long-run historical view of globalization argues that globalization is not a recent phenomenon , but rather a process that has existed throughout human history. This view emphasizes that trade, migration, cultural exchange, and cross-border interactions have occurred for thousands of years, long before modern multinational enterprises or digital technologies emerged.

Under this perspective, early examples of globalization include ancient trade routes such as the Silk Road, maritime trade across the Mediterranean, and colonial-era exchanges of goods, capital, and labor. Although the scale, speed, and complexity of globalization have increased dramatically in recent decades, the underlying idea of cross-border integration is seen as historically continuous.

This view contrasts with more recent interpretations that define globalization as a post–World War II or late 20th-century phenomenon driven by multinational corporations, trade liberalization, and digital communication. The long-run historical view does not deny the importance of these modern forces but argues that they represent an intensification , not the origin, of globalization.

For managers, this perspective is important because it frames globalization as a persistent structural force rather than a temporary trend. Firms operating globally must recognize that international economic integration has deep roots and is likely to continue evolving rather than reversing permanently.

Therefore, option C correctly identifies the long-run historical view as the perspective that sees globalization as an enduring feature of human civilization.

In Global Economics for Managers , an import tariff raises the domestic price of the imported good, making producer surplus for domestic producers increase , which makes option B correct.

When a tariff is imposed on imported footwear, foreign suppliers face higher costs, reducing imports. Domestic producers benefit from reduced competition and higher market prices, allowing them to increase output and earn higher surplus.

Option A is incorrect because imports decrease. Option C is incorrect because higher prices reduce domestic demand. Option D is incorrect because consumer surplus falls due to higher prices and fewer choices.

Tariffs redistribute surplus from consumers to producers and the government, while also creating deadweight loss. Thus, option B is correct.

In Global Economics for Managers , producer surplus measures the benefit that sellers receive from participating in a market , making option A the correct answer. Producer surplus represents the difference between the price sellers receive for a good and the minimum price they are willing to accept to produce that good.

This concept reflects the gains to producers from market transactions. At a given market price, some producers are willing to supply goods at lower costs than others. When the market price exceeds a producer’s cost of production, that producer earns a surplus. Summing this surplus across all producers yields total producer surplus.

Option B refers to a shortage or surplus condition, not producer surplus. Option C describes economic well-being , which is more broadly measured by indicators like GDP or total surplus. Option D defines consumer surplus , which measures benefits to buyers, not sellers.

Global Economics for Managers emphasizes that producer surplus, together with consumer surplus, forms total economic surplus , a key measure of market efficiency. Policies such as taxes, subsidies, and price controls affect producer surplus by changing prices and quantities.

For managers, understanding producer surplus helps analyze how market prices, costs, and policy interventions affect firm profitability and incentives. Therefore, option A correctly defines producer surplus.

In Global Economics for Managers , tariffs are shown to redistribute economic surplus , making option C correct. When a tariff is imposed, consumers lose surplus due to higher prices, while domestic producers gain surplus and the government collects tariff revenue.

However, the gains to producers and government do not fully offset consumer losses, resulting in deadweight loss. Thus, tariffs reduce total economic welfare even though certain groups benefit.

Options A, B, and D are incorrect.

Therefore, option C accurately summarizes the overall economic effect of tariffs.

In Global Economics for Managers, spot transactions are one of the three primary types of foreign exchange transactions, making option B correct. Spot transactions involve the immediate exchange of currencies, typically settled within two business days.

The three main foreign exchange transactions are:

Spot transactions

Forward transactions

Swap transactions

Spot transactions form the foundation of currency trading and are widely used for international trade payments and short-term currency needs.

Options C and D describe strategies rather than transaction types.

Thus, option B is correct.

In Global Economics for Managers , democracies are characterized by civil liberties, economic freedoms, and relatively lower political risk , making options A, C, and D correct.

Democracies protect freedom of expression and organization, allow domestic and foreign firms to operate, and provide stable institutional environments with predictable rules.

Options B and E describe authoritarian systems, not democracies.

Thus, A, C, and D correctly describe democratic systems.

In Global Economics for Managers , one of the four core elements of Porter’s Diamond Model of National Competitive Advantage is domestic demand conditions , making option C the correct answer. Michael Porter’s framework explains why certain industries within particular countries achieve international competitiveness, emphasizing the role of the national environment in shaping firm performance.

Domestic demand conditions refer to the nature, size, and sophistication of demand in the home market . When domestic consumers are demanding, quality-conscious, and forward-looking, firms are pressured to innovate, improve product quality, and adopt advanced production methods. These pressures help firms develop capabilities that later become advantages in international markets. For example, firms accustomed to serving sophisticated domestic buyers are better prepared to compete globally.

Option A is incorrect because firm opportunity costs are a general microeconomic concept and are not part of the Porter Diamond. Option B is incorrect because the model emphasizes domestic factor conditions , not foreign supply markets. Option D, trade deficits, is a macroeconomic outcome and does not explain the structural sources of competitive advantage within industries.

Global Economics for Managers highlights that Porter’s Diamond consists of four interrelated determinants: factor conditions, domestic demand conditions, related and supporting industries, and firm strategy, structure, and rivalry. Among these, domestic demand conditions are particularly important because they influence the direction and pace of innovation. Strong home demand encourages firms to anticipate global trends rather than merely react to them.

For managers, understanding domestic demand conditions helps explain why firms from certain countries dominate specific global industries. Therefore, option C accurately identifies a key element of the Porter Diamond theory.

In Global Economics for Managers , consumer surplus is defined as the difference between what a consumer is willing to pay for a good and what the consumer actually pays , making option A correct.

In this example, the shopper was willing to pay $25 but paid only $17. The consumer surplus is therefore:

Consumer Surplus = Willingness to Pay − Price Paid

Consumer Surplus = $25 − $17 = $8

This $8 represents the net benefit the consumer gains from the transaction. Consumer surplus captures the idea that consumers often value goods more than the market price, and the difference contributes to their economic welfare.

Options B and C incorrectly refer to producer surplus, which depends on production costs rather than consumer willingness to pay. Option D incorrectly states that consumer surplus equals $25, which is the maximum willingness to pay, not the surplus.

Global Economics for Managers uses consumer surplus extensively to evaluate the effects of price changes, taxes, and trade policies on consumer welfare. Thus, option A is correct.

In Global Economics for Managers , a market-seeking company is one that invests in or enters a foreign location primarily to serve local or regional customers , making option C the correct answer. Market-seeking behavior is driven by demand-side considerations rather than cost or resource availability.

Option C describes a firm searching for a location where there is high consumer interest in camping supplies , which directly reflects a desire to access and serve a specific market. Such firms are motivated by factors like market size, growth potential, consumer preferences, and proximity to customers. Market-seeking firms often establish foreign subsidiaries, sales offices, or production facilities to adapt products to local tastes and respond quickly to demand.

Option A describes a resource-seeking firm, focused on obtaining low-cost or specialized inputs. Option B also reflects resource-seeking behavior, specifically in extractive industries. Option D describes a cost-seeking (efficiency-seeking) firm that locates production in regions with low labor costs.

Global Economics for Managers classifies foreign direct investment motives into market-seeking, resource-seeking, efficiency-seeking, and strategic asset-seeking. Market-seeking investment is particularly common in consumer goods and service industries, where understanding local preferences is critical for success.

For managers, recognizing market-seeking motives helps guide decisions about location, marketing strategy, and product adaptation. Thus, option C accurately illustrates a market-seeking company.

In Global Economics for Managers , fixed costs are costs that do not vary with the level of output in the short run, making options C and D correct.

Option C, a state license fee , is fixed because it must be paid regardless of how much output is produced. Option D, monthly internet service , is also fixed since the cost remains constant even if production rises or falls.

Options A, B, and E are variable costs because they increase as output increases. Sales commissions depend on sales volume, flour usage depends on bread production, and parts costs rise with the number of devices produced.

Understanding fixed costs is essential for break-even analysis and short-run production decisions. Thus, C and D are correct.

In Global Economics for Managers , the regulatory pillar of formal institutions represents the coercive power of governments , making option C correct. Regulatory institutions consist of laws, rules, regulations, and enforcement mechanisms that shape economic behavior through rewards and punishments.

The regulatory pillar relies on the authority of the state to enforce compliance. Governments impose sanctions such as fines, imprisonment, or license revocation to ensure adherence to laws. For firms, this pillar defines what is legally permissible in areas such as labor practices, taxation, environmental standards, and competition policy.

The other institutional pillars—normative and cognitive—do not rely on coercion. Normative institutions are based on social norms and values, while cognitive institutions reflect shared beliefs and taken-for-granted assumptions.

Understanding the regulatory pillar is essential for managers because violations can result in severe legal and financial consequences. Thus, option C correctly identifies the pillar associated with government coercive power.

Property rights are the legal rights to use, control, transfer, and benefit from an economic resource. Option C is correct because it describes the broad economic meaning of property rights. Secure property rights allow individuals and firms to invest, trade, innovate, and plan for the long term because they can expect to capture the benefits from their resources. Weak property rights increase uncertainty, discourage investment, and raise the risk of theft, expropriation, or contract failure. Option A describes copyright, which protects original works of authorship. Option B describes patents, which protect inventions or processes. Option D describes trademarks, which protect names, brands, and designs used to distinguish products. These are forms of intellectual property, but C is the general definition.

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In Global Economics for Managers , tariffs are recognized as a policy tool that allows governments to raise revenue , making option C correct.

Tariffs generate revenue by taxing imported goods. While domestic producers may benefit and governments gain revenue, consumers lose due to higher prices and reduced choices. Tariffs also create deadweight loss, reducing overall economic efficiency.

Options A, B, and D contradict standard trade theory.

Therefore, option C is correct.

In Global Economics for Managers , monopolistic competition is characterized by many sellers , product differentiation , and free entry and exit , making options A, B, and C correct.

Firms sell products that are similar but not identical, allowing them some degree of pricing power. Examples include restaurants, clothing brands, and personal services. Because entry is relatively easy, economic profits tend to be eliminated in the long run.

Options D and E describe monopoly or perfect competition, not monopolistic competition.

Thus, A, B, and C correctly describe monopolistic competition.

In Global Economics for Managers , producer surplus measures the well-being of sellers , making option B correct.

Producer surplus is the difference between the price producers receive and the minimum price they are willing to accept. It reflects profits plus fixed costs and indicates how much sellers benefit from participating in a market.

Options A and D confuse producer surplus with consumer or total surplus. Option C is incorrect because producer surplus is not total revenue.

Therefore, option B is correct.

In Global Economics for Managers , a mixed economy is defined as an economic system that combines elements of both a market economy and a command economy , making option C the correct answer. In a mixed economy, resource allocation is determined partly by market forces—such as supply, demand, and prices—and partly by government intervention through regulation, taxation, public spending, and state ownership in selected sectors.

Most modern economies are mixed economies. While private firms and consumers make many economic decisions independently, governments play an active role in correcting market failures, providing public goods, redistributing income, and stabilizing the economy. Examples include regulations on labor and environmental standards, public education and healthcare systems, and social welfare programs.

Option A, fair economy, and option D, compromise economy, are not standard economic classifications. Option B, market-command economy, is not a formally recognized system in managerial economics.

Global Economics for Managers emphasizes that understanding mixed economies is critical for managers because government policies directly affect costs, pricing, competition, and strategic decisions. Thus, option C correctly identifies the system that blends market and command features.

In Global Economics for Managers , monopolies arise when barriers to entry prevent competitors from entering a market. Two common barriers are control of a key resource and economies of scale , making options A and B correct.

When a single firm owns a unique or scarce resource, competitors cannot produce the good without access to that resource. Economies of scale create monopolies when one firm can produce at a lower average cost than multiple firms due to high fixed costs.

Options C, D, and E promote competition rather than monopoly.

Thus, options A and B correctly identify monopoly-creating barriers to entry.

In Global Economics for Managers , a resource-based monopoly arises when a single firm controls a unique, scarce resource that cannot be easily replicated or accessed by competitors. Option D correctly illustrates this situation. When only one mine in the world possesses a rare jewel, the firm owning that mine has exclusive control over the supply of that resource, creating monopoly power.

This type of monopoly differs from legal or technological monopolies. The monopoly exists not because of government protection or intellectual property rights, but because of natural scarcity . Competitors cannot enter the market without access to the same resource, and alternative sources may be unavailable or prohibitively costly. As a result, the monopolist can restrict output and charge prices above marginal cost.

Option A describes a natural monopoly based on cost structure rather than resource ownership. Options B and C describe legal monopolies created by copyright protection, not resource monopolies.

Thus, option D correctly demonstrates a monopoly created by control over a unique resource.

In Global Economics for Managers , the profit-maximizing condition for all firms , including monopolies, is when marginal revenue (MR) equals marginal cost (MC) , making option B correct.

A monopolist faces a downward-sloping demand curve, meaning that to sell more output, it must lower price. As a result, marginal revenue is less than price. The firm maximizes profit by producing the quantity where the additional revenue from the last unit sold equals the additional cost of producing it.

Option A applies to perfect competition , not monopoly. Option C focuses on revenue rather than profit. Option D has no economic meaning for profit maximization.

Thus, option B is correct.

Small-scale entry allows a firm to enter a foreign market cautiously, gain experience, and learn about local demand, institutions, competitors, distribution channels, and regulatory conditions without committing excessive capital. Option C is correct because learning by doing while limiting downside risk is the central advantage of small-scale entry. This approach is useful when market uncertainty is high or when managers lack reliable local knowledge. Option A is more consistent with large-scale entry, which signals major strategic commitment. Option B is incorrect because small-scale entry does not necessarily provide full control, especially if the firm uses partnerships, exporting, or limited investment. Option D is too optimistic because small-scale entry may limit speed and market-share growth. Its main benefit is controlled learning.

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According to Global Economics for Managers , an institutional framework is composed of formal and informal systems , making options B (Informal) and E (Formal) correct. Institutions are the “rules of the game” that structure economic, political, and social interactions and reduce uncertainty for firms and individuals.

Formal institutions include written and legally enforced rules such as constitutions, laws, regulations, contracts, and property rights. These systems are enforced by governments and legal authorities and provide predictable constraints on behavior. For managers, formal institutions define what is legally permissible and shape decisions related to investment, employment, and market entry.

Informal institutions , by contrast, consist of unwritten rules such as norms, customs, traditions, and cultural values. These systems are enforced through social approval or disapproval rather than legal sanctions. Informal institutions often guide behavior when formal rules are weak, ambiguous, or poorly enforced.

The remaining options are not the two foundational systems identified in managerial economics. Cognitive and normative elements are sometimes discussed as pillars of institutions, but the broad institutional framework is consistently categorized into formal and informal systems. Firm and personal systems are not institutional categories.

Global Economics for Managers stresses that managers operating globally must understand both systems, as ignoring informal rules can lead to business failure even when firms comply with formal laws. Therefore, informal and formal systems together constitute the institutional framework.

An increase in inflation generally reduces the value of a country’s currency relative to other currencies. Higher inflation lowers purchasing power because domestic goods and services become more expensive compared with foreign alternatives. As the country’s exports become less competitive and imports become relatively more attractive, demand for the domestic currency tends to fall. Under purchasing power parity logic, currencies of countries with higher inflation tend to depreciate over time. Option D is therefore correct. Option B is incorrect because currency appreciation is more commonly associated with lower inflation, higher productivity, or higher real interest rates. Option A is too rigid because inflation is one of the major determinants of exchange-rate movement. Option C is weaker than D because the expected direction is depreciation.

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A turnkey project is an entry mode in which a contractor designs, constructs, and prepares a facility for operation, then hands it over to the client when it is ready to run. Option B is correct because it includes both construction and personnel training, which are typical elements of turnkey arrangements. These projects are common in complex industries such as energy, infrastructure, manufacturing, and industrial facilities where specialized technical knowledge is required. Option A describes a joint venture, not a turnkey project. Option C describes a referral or co-marketing arrangement. Option D describes greenfield investment, where a company builds its own new facilities from scratch. Turnkey projects allow firms to profit from expertise while limiting long-term ownership exposure.

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In Global Economics for Managers , an indifference curve represents all combinations of goods that provide the same level of satisfaction (utility) to a consumer. If Point A and Point B lie on the same indifference curve, the consumer is indifferent between the two bundles, making option B correct.

This means the consumer derives equal satisfaction from either bundle and has no preference for one over the other. Movement along an indifference curve reflects trade-offs between goods while maintaining constant utility.

Options A and D relate to cost, which is irrelevant to indifference curves. Option C is incorrect because preference differences occur only when points lie on different indifference curves.

Thus, option B correctly describes the implication of two points on the same indifference curve.

In Global Economics for Managers , globalization is defined as the close integration of countries and peoples of the world , which makes option C the correct and most comprehensive answer. This definition reflects the central idea that globalization is a broad process through which national economies become increasingly interconnected and interdependent. It emphasizes integration rather than any single outcome such as trade expansion or regulatory change.

Globalization involves the growing cross-border movement of goods and services, capital flows, labor migration, technology transfer, and information exchange. For managers, this integration fundamentally alters business decision making by expanding market opportunities while simultaneously increasing exposure to global competition and risk. Firms must evaluate international sourcing options, global consumer demand, exchange rate movements, and geopolitical conditions when making strategic choices.

Option A is incorrect because globalization is not primarily defined by the expansion of regulatory authority. While regulatory coordination may arise as economies integrate, it is a secondary effect rather than the core meaning of globalization. Option B refers to product customization and market segmentation, which are managerial marketing strategies and not a defining feature of globalization. Option D is too narrow because globalization is not limited to creating a single global market for goods and services; it also includes international financial integration, labor mobility, and the diffusion of ideas and managerial practices.

According to Global Economics for Managers , globalization has been driven by trade liberalization, advances in transportation and communication technologies, and declining transaction costs. These forces enable firms to operate global value chains and consumers to access a wider variety of products at lower prices. At the same time, globalization introduces challenges such as increased competitive pressure, economic volatility, and political resistance, all of which managers must account for in decision making.

Therefore, defining globalization as the close integration of countries and peoples accurately captures its scope and relevance within the context of business decision making in the global environment.

In Global Economics for Managers , formal institutions are represented primarily by laws , making option C correct. Formal institutions include constitutions, statutes, regulations, contracts, and property rights that are officially codified and enforced by governments or legal authorities.

These institutions reduce uncertainty by clearly defining acceptable behavior and outlining consequences for violations. For firms, formal institutions establish the legal framework for business operations, including rules governing entry, competition, taxation, and dispute resolution.

Options A, B, and D describe informal institutions , which are unwritten and enforced through social mechanisms rather than legal authority.

Therefore, option C correctly identifies laws as representations of formal institutions.

In Global Economics for Managers , equity modes of entry involve ownership stakes in foreign operations. Strategic alliances , greenfield investments , and acquisitions all require equity participation, making options A, B, and C correct.

Strategic alliances often involve shared ownership and joint decision-making. Greenfield investments require firms to build new facilities from scratch, while acquisitions involve purchasing existing foreign firms.

Licensing and franchising are non-equity contractual modes.

Therefore, options A, B, and C correctly identify equity modes of entry.

In Global Economics for Managers , an import tariff generates government revenue , making option C correct.

A tariff is a tax on imported goods. When apples are imported and subject to a tariff, the government collects revenue equal to the tariff rate multiplied by the quantity imported. Although the quantity of imports usually declines after a tariff is imposed, the government still earns revenue on remaining imports.

This revenue comes at the expense of consumers, who face higher prices, and contributes to deadweight loss. However, from the government’s perspective, tariff revenue increases.

Thus, option C is correct.

In Global Economics for Managers , the Federal Reserve increases the money supply primarily through open market operations , specifically by buying government bonds from the public , making option C correct.

When the Fed purchases government securities, it pays banks and other sellers by crediting their reserves. This action increases the amount of reserves in the banking system, enabling banks to extend more loans. As lending expands, the money supply grows through the money multiplier process.

Option A would decrease the money supply. Option B tightens monetary conditions. Option D reduces banks’ ability to lend.

Managers should understand this mechanism because changes in the money supply affect interest rates, investment, exchange rates, and aggregate demand. Therefore, option C accurately describes how the Fed increases the money supply.

A trade surplus occurs when a country exports more goods and services than it imports during a given period. This means foreign buyers purchase more from the country than the country purchases from abroad. Option A is correct because it accurately describes a positive balance of trade. A trade deficit is the opposite condition, where imports exceed exports. Mercantilism is an older trade theory that emphasized accumulating wealth through exports and limiting imports, but it is not the term for the actual trade-balance condition. Resource mobility refers to the ability of labor, capital, or other resources to move from one use or industry to another. For managers, trade surpluses can affect currency strength, export opportunities, and international competitiveness.

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In Global Economics for Managers , a market surplus occurs when quantity supplied exceeds quantity demanded , making option B correct.

Surpluses typically arise when prices are set above the equilibrium level. At higher prices, producers supply more while consumers demand less, creating excess supply. Market forces then place downward pressure on prices until equilibrium is restored.

Options A and C describe shortages. Option D may be true in some cases but is not the defining characteristic.

Thus, option B correctly defines a market surplus.

In Global Economics for Managers , when the multiplier effect exceeds the crowding-out effect , increased government spending causes aggregate demand (AD) to rise by more than the initial increase in spending , making option A correct.

The multiplier effect occurs because government spending generates income, which leads to further consumption. Crowding out occurs when government borrowing raises interest rates and reduces private investment. If the multiplier is stronger, the net effect is an amplified increase in AD.

Thus, option A is correct.

According to Global Economics for Managers , forward transactions are one of the three primary types of foreign exchange transactions, making option B the correct answer. The three main types are spot transactions, forward transactions, and swap transactions , which form the foundation of foreign exchange market activity.

A forward transaction is a contract in which two parties agree to exchange a specified amount of currency at a predetermined exchange rate on a future date. These contracts are widely used by firms to hedge against exchange rate risk , allowing managers to lock in costs or revenues and reduce uncertainty in international transactions.

Option A, hedges, describes the purpose of some foreign exchange transactions rather than a transaction type itself. Option C, balanced transactions, is not a recognized category in foreign exchange markets. Option D, straddles, refers to an options-based financial strategy, not a primary foreign exchange transaction.

Global Economics for Managers stresses that understanding forward transactions is essential for international business decision making. Exchange rate volatility can significantly affect profitability, and forward contracts provide firms with a practical tool to manage this risk.

For managers engaged in global trade and investment, forward transactions support planning, budgeting, and pricing decisions by reducing exposure to unpredictable currency movements. Therefore, option B accurately identifies one of the primary foreign exchange transaction types.

Economies of scale are a common barrier to entry that can help create monopoly power. Option D is correct because when average costs decline as output increases, a large established firm may produce at a lower per-unit cost than potential entrants. New firms entering at small scale may be unable to match the incumbent’s cost advantage, making entry unattractive or impossible. This is especially important in industries with high fixed costs, such as utilities, railways, telecommunications infrastructure, and large-scale manufacturing. Option A may reduce competition, but it is not the standard structural barrier described here. Elastic demand curves do not block entry. Progressive tax structures are tax systems, not typical monopoly barriers. Economies of scale are one of the classic reasons monopolies can persist.

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Cross-price elasticity of demand measures how the quantity demanded of one good changes in response to a price change in another good. Option A is correct because this concept identifies whether goods are substitutes or complements. If cross-price elasticity is positive, the goods are substitutes; when the price of one rises, demand for the other increases. For example, if coffee becomes more expensive, demand for tea may rise. If cross-price elasticity is negative, the goods are complements; when the price of one rises, demand for the other falls. For example, if printers become more expensive, demand for printer cartridges may decline. Price elasticity of demand measures responsiveness to the good’s own price, not another good’s price. The other options are not standard terms.

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