So the first larger means: “A price change in Southeast timber causes a stronger demand response for Northwest timber.”
The second larger means: “A price change in Northwest timber itself causes a stronger demand response for Northwest timber.”

First blank: cross-price elasticity becomes larger

Cross-price elasticity of demand measures the change in demand for one good in response to a change in the price of another good . In this timber question, you can think of it as:

percentage change in quantity demanded of Northwest timber
÷ percentage change in the price of Southeast timber

If Northwest timber and Southeast timber are substitutes, buyers can switch between them when relative prices change. OpenStax explains the basic substitute relationship this way: when two goods are substitutes, a price drop for one good leads consumers to substitute toward that good and reduce consumption of the other .

That is why greater substitutability makes the cross-price elasticity larger. The more alike the two types of timber are from the buyer’s point of view, the more a price change in one region affects demand for timber from the other region.

Second blank: Northwest timber’s own-price elasticity also becomes larger

The second blank is not asking again about the price of Southeast timber. It is asking about Northwest timber’s demand response to its own price.

The key idea is still substitution. Research on softwood lumber demand notes that demand price elasticities depend on the number and quality of substitutes available for a product . If Southeast timber becomes a closer substitute for Northwest timber, then buyers have a more realistic alternative when Northwest timber becomes more expensive.

The logic is:

Southeast timber becomes a closer substitute
→ buyers can switch away from Northwest timber more easily
→ a rise in Northwest timber’s price causes a larger drop in quantity demanded
→ Northwest timber’s own-price demand elasticity becomes larger

So the second blank is also larger.

Why “larger; smaller” is the tempting but wrong answer

The mistake in choosing larger; smaller is the second blank. Better substitutes do not make demand for Northwest timber less sensitive to price. They make it more sensitive.

If Northwest timber has no close alternative, buyers may keep buying it even after a price increase. But if Southeast timber is a close substitute, buyers have somewhere else to go. That makes the quantity demanded of Northwest timber respond more strongly to its own price change, which means a larger own-price elasticity of demand .

In short:

• Cross-price elasticity asks how demand for one good responds to the price of another good .
• Own-price demand elasticity asks how demand for a good responds to its own price.
• Better substitutes increase price sensitivity in both cases .

“Larger” does not necessarily mean greater than 1

Here, larger is a relative word. It means “larger than it would be if the two types of timber were less substitutable.” The question gives the direction of change, not the numerical price and quantity changes needed to calculate an exact elasticity .

It also does not mean Northwest timber’s demand elasticity must be greater than 1. The softwood lumber literature summarized by the USDA Forest Products Laboratory notes that most post-World War II studies found softwood lumber demand to be inelastic, meaning less than 1 in absolute value . That does not contradict the answer. An elasticity can become larger while still remaining below 1.

Quick memory rule

Closer substitutes → larger cross-price elasticity
Better substitutes → larger own-price demand elasticity

Applied to the question: the greater the substitutability between Northwest timber and Southeast timber, the larger the cross elasticity of demand between timber from the two regions, and the larger the elasticity of demand for Northwest timber. The answer is D: larger; larger .

So the first larger means: “A price change in Southeast timber causes a stronger demand response for Northwest timber.”
The second larger means: “A price change in Northwest timber itself causes a stronger demand response for Northwest timber.”

First blank: cross-price elasticity becomes larger

Cross-price elasticity of demand measures the change in demand for one good in response to a change in the price of another good . In this timber question, you can think of it as:

percentage change in quantity demanded of Northwest timber
÷ percentage change in the price of Southeast timber

If Northwest timber and Southeast timber are substitutes, buyers can switch between them when relative prices change. OpenStax explains the basic substitute relationship this way: when two goods are substitutes, a price drop for one good leads consumers to substitute toward that good and reduce consumption of the other .

That is why greater substitutability makes the cross-price elasticity larger. The more alike the two types of timber are from the buyer’s point of view, the more a price change in one region affects demand for timber from the other region.

Second blank: Northwest timber’s own-price elasticity also becomes larger

The second blank is not asking again about the price of Southeast timber. It is asking about Northwest timber’s demand response to its own price.

The key idea is still substitution. Research on softwood lumber demand notes that demand price elasticities depend on the number and quality of substitutes available for a product . If Southeast timber becomes a closer substitute for Northwest timber, then buyers have a more realistic alternative when Northwest timber becomes more expensive.

The logic is:

Southeast timber becomes a closer substitute
→ buyers can switch away from Northwest timber more easily
→ a rise in Northwest timber’s price causes a larger drop in quantity demanded
→ Northwest timber’s own-price demand elasticity becomes larger

So the second blank is also larger.

Why “larger; smaller” is the tempting but wrong answer

The mistake in choosing larger; smaller is the second blank. Better substitutes do not make demand for Northwest timber less sensitive to price. They make it more sensitive.

If Northwest timber has no close alternative, buyers may keep buying it even after a price increase. But if Southeast timber is a close substitute, buyers have somewhere else to go. That makes the quantity demanded of Northwest timber respond more strongly to its own price change, which means a larger own-price elasticity of demand .

In short:

• Cross-price elasticity asks how demand for one good responds to the price of another good .
• Own-price demand elasticity asks how demand for a good responds to its own price.
• Better substitutes increase price sensitivity in both cases .

“Larger” does not necessarily mean greater than 1

Here, larger is a relative word. It means “larger than it would be if the two types of timber were less substitutable.” The question gives the direction of change, not the numerical price and quantity changes needed to calculate an exact elasticity .

It also does not mean Northwest timber’s demand elasticity must be greater than 1. The softwood lumber literature summarized by the USDA Forest Products Laboratory notes that most post-World War II studies found softwood lumber demand to be inelastic, meaning less than 1 in absolute value . That does not contradict the answer. An elasticity can become larger while still remaining below 1.

Quick memory rule

Closer substitutes → larger cross-price elasticity
Better substitutes → larger own-price demand elasticity

Applied to the question: the greater the substitutability between Northwest timber and Southeast timber, the larger the cross elasticity of demand between timber from the two regions, and the larger the elasticity of demand for Northwest timber. The answer is D: larger; larger .