The cross-price elasticity of demand between Fanta and Dr. Pepper has been estimated at 0.61. If the price of Dr. Pepper falls by 10%, the quantity demanded of Fanta will:
A)decrease by less than 6.1%.
B)decrease by 6.1%.
C)not change because many people prefer Fanta to Dr. Pepper.
D)increase.

Question

Quizplus · Accepted Answer

The positive cross-price elasticity between Fanta and Dr. Pepper (0.61) implies that these two goods are substitutes for each other. So, a decrease in the price of Dr. Pepper will lead to an increase in the quantity demanded of Dr. Pepper, and also a decrease in the quantity demanded of Fanta. The magnitude of this effect can be measured by the cross-price elasticity of demand. If the price of Dr. Pepper falls by 10%, the quantity demanded of Dr. Pepper will increase by 10%*0.61=6.1%. Therefore, the quantity demanded of Fanta will decrease by the same percentage, which is 6.1%. Therefore, the correct answer is B.

The Cross-Price Elasticity of Demand Between Fanta and Dr