Multiple Choice
Which of the following is most important for successfully using behavioral segmentation in consumer markets?
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5. Consumer and Producer Surplus; Price Ceilings and Floors
Consumer Surplus and Willingness to Pay
Multiple Choice
If cola and iced tea are good substitutes for consumers, then it is likely that:
A
the cross-price elasticity of demand between cola and iced tea is positive
B
an increase in the price of cola will decrease the demand for iced tea
C
consumer surplus for cola will increase if the price of iced tea decreases
D
consumers' willingness to pay for cola is unaffected by the price of iced tea
Verified step by step guidance1
Step 1: Understand the concept of substitutes in microeconomics. Two goods are substitutes if an increase in the price of one good leads to an increase in the demand for the other good, as consumers switch from the more expensive good to the cheaper alternative.
Step 2: Recall the definition of cross-price elasticity of demand, which measures the responsiveness of the quantity demanded of one good 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 3: For substitute goods, the cross-price elasticity of demand is positive because when the price of one good (e.g., cola) increases, the demand for the other good (e.g., iced tea) increases.
Step 4: Analyze the given options in light of this concept: an increase in the price of cola should increase, not decrease, the demand for iced tea; consumer surplus for cola would not necessarily increase if the price of iced tea decreases because consumers might switch to iced tea; and consumers' willingness to pay for cola is affected by the price of iced tea since they are substitutes.
Step 5: Conclude that the correct statement is that the cross-price elasticity of demand between cola and iced tea is positive, reflecting their status as substitute goods.
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