Economists have estimated that the cross-price elasticity of demand between beer and spirits is -0.50, the income elasticity for spirits is 1.21 and the income elasticity for wine is 5.03. These elasticities mean that:

a) beer and spirits are complements, spirits and wine are luxuries.

b) beer and spirits are normal goods, spirits and wine are luxuries.

c) beer and spirits are complements, spirits are substitutes.

d) beer and spirits are substitutes, spirits and wine are luxuries.

The correct answer is a) beer and spirits are complements, spirits and wine are luxuries.

The cross-price elasticity of demand (XED) shows the responsiveness in the demand for a good 1 when the price of good 2 changes. The XED coefficient is classified with the following criteria.

• XED coefficient is positive - Goods are substitutes
• XED coefficient is negative - Goods are complements
• XED coefficient is zero - Goods are unrelated

Based on the criteria given above, beers and spirits have a negative XED coefficient which means that goods are complements.

The income elasticity of demand (YED) shows the responsiveness in the demand for a good when the income of consumers change. The YED coefficient is classified with the following criteria.

• YED>1 - Luxury goods
• 0<YED<1- Normal goods
• YED<0 - Inferior goods

Therefore, both goods have an income elasticity of demand greater than 1 so they are luxury goods.

In conclusion, the correct answer is option a).

Option b) is incorrect because the XED does not include normal goods as a classification. Option c) is also incorrect because the YED does not include substitutes as a classification- Option d) is incorrect because beer and spirits do not have a positive XED coefficient, therefore, they are not substitutes.