The cross price elasticity of demand for Pepsi with respect to the price of Coke has been estimated to be 0.80.If the price of Coke increases by 10 percent in a period, how will that affect the demand for Pepsi in that period, all other things unchanged?
A) The demand for Pepsi will increase 0.80 percent.
B) The demand for Pepsi will increase by 8 percent.
C) The demand for Pepsi will not change because many people prefer Coke over Pepsi.
D) The demand for Coke will fall and the demand for Pepsi will increase.

Question

Quizplus · Accepted Answer

The cross price elasticity of demand for Pepsi with respect to the price of Coke being 0.80 implies that for every 1% increase in the price of Coke, the demand for Pepsi will increase by 0.80%. Therefore, if the price of Coke increases by 10%, the demand for Pepsi will increase by 8% (0.80 x 10).

The Cross Price Elasticity of Demand for Pepsi with Respect