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 due to the income effect.
B) The demand for Coke will increase by 6.1 percent.
C) The demand for Coke will fall by 6.1 percent.
D) The demand for Coke will fall by 0.61 percent.

Question

Quizplus · Accepted Answer

The cross price elasticity of demand for Coke with respect to the price of Pepsi is positive but less than 1, indicating that Coke and Pepsi are somewhat substitutes. Therefore, if the price of Pepsi falls by 10 percent, the demand for Coke will fall by 6.1 percent, as indicated by the cross price elasticity (0.61 x -10% = -6.1%). The income effect is not relevant in this case as the only change is in the price of Pepsi.

The Cross Price Elasticity of Demand for Coke with Respect