Multiple Choice
An increase in the demand for chicken, from 8,000 to 12,000, was caused by an increase in the price of beef from \$4.50 to \$5.50. Therefore, the cross-price elasticity for these two products is:
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4. Elasticity
Cross-Price Elasticity of Demand
Multiple Choice
We would expect the cross-price elasticity of demand between Pepsi and Coke to be:
A
negative, because they are complementary goods
B
undefined, because cross-price elasticity does not apply to beverages
C
positive, because they are substitute goods
D
zero, because they are unrelated goods
Verified step by step guidance1
Step 1: Understand the concept of cross-price elasticity of demand, which measures how the quantity demanded of one good responds to a change in the price of another good. It is calculated as:
\[\text{Cross-price elasticity} = \frac{\% \text{ change in quantity demanded of Good A}}{\% \text{ change in price of Good B}}\]
Step 2: Identify the relationship between the two goods in question. Substitute goods are goods that can replace each other, so if the price of one increases, the demand for the other increases. Complementary goods are used together, so if the price of one increases, the demand for the other decreases.
Step 3: Apply this understanding to Pepsi and Coke. Since they are both soft drinks that serve as alternatives to each other, they are considered substitute goods.
Step 4: Recall that for substitute goods, the cross-price elasticity of demand is positive because an increase in the price of one good leads to an increase in the demand for the other good.
Step 5: Conclude that the cross-price elasticity of demand between Pepsi and Coke is positive, reflecting their status as substitute goods.
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