The cross price elasticity of demand for Coke with respect to the price of Pepsi has been estimated to be 0.61.If the price of Pepsi falls by 10 percent in a period, how will that affect the demand for Coke in that period, all other things unchanged?
A) The demand for Coke will increase but by less than 6.1 percent.
B) The demand for Coke will increase by 6.1 percent.
C) The demand for Coke will not change because many people prefer Coke over Pepsi.
D) The demand for Coke will fall.

Question

Quizplus · Accepted Answer

The cross price elasticity of demand indicates how the demand for one good responds to a change in the price of another good. A positive cross price elasticity, like 0.61, suggests that the two goods are substitutes. Therefore, if the price of Pepsi falls by 10 percent, people will buy more Pepsi instead of Coke, leading to a decrease in the demand for Coke.

The Cross Price Elasticity of Demand for Coke with Respect