If substitutability between Northwest timber and Southeast timber is high, the cross elasticity of demand between timber from the two regions is ______ and the own-price elasticity of demand for Northwest timber is ______.

If substitutability between Northwest timber and Southeast timber is high, the cross elasticity of demand between timber from the two regions is ______ and the own-price elasticity of demand for Northwest timber is ______.

• A. smaller; smaller
• B. larger; smaller
• C. smaller; larger
• D. larger; larger

Answer: (D)

High substitutability means the two timbers are close substitutes, so demand for one responds strongly to price changes in the other. The cross elasticity of demand is the percent change in the quantity of Northwest timber demanded when the price of Southeast timber changes; with close substitutes, this response is large and positive, since buyers quickly switch between them when relative prices shift. At the same time, the own-price elasticity of Northwest timber—how much its quantity demanded responds to its own price—also becomes larger in magnitude because a price increase makes buyers substitute toward Southeast timber, leading to a substantial drop in Northwest timber demand. Thus, both elasticities rise when substitutability is high.

High substitutability means the two timbers are close substitutes, so demand for one responds strongly to price changes in the other. The cross elasticity of demand is the percent change in the quantity of Northwest timber demanded when the price of Southeast timber changes; with close substitutes, this response is large and positive, since buyers quickly switch between them when relative prices shift. At the same time, the own-price elasticity of Northwest timber—how much its quantity demanded responds to its own price—also becomes larger in magnitude because a price increase makes buyers substitute toward Southeast timber, leading to a substantial drop in Northwest timber demand. Thus, both elasticities rise when substitutability is high.