If the price of Coke rises by 5 percent and the sales of Pepsi go up by 10 percent,we can conclude that
A)The sign on the cross-price elasticity will be negative.
B)Both goods are normal goods.
C)Both goods are substitute goods because the cross-price elasticity is +0.5.
D)Both goods are substitute goods because the cross-price elasticity is +2.

Question

Quizplus · Accepted Answer

An increase in the price of Coke leads to an increase in the demand for Pepsi, indicating that the two goods are substitutes. The cross-price elasticity of demand can be calculated as the percentage change in the quantity demanded of Pepsi divided by the percentage change in the price of Coke. Using the given information, we have:

Cross-price elasticity = (% change in quantity demanded of Pepsi) / (% change in price of Coke)
Cross-price elasticity = 10% / 5% = 2

Since the cross-price elasticity is greater than zero, we know that the goods are substitutes. A positive cross-price elasticity also suggests that an increase in the price of Coke leads to an increase in the quantity demanded of Pepsi. Therefore, choice D is the best option.

If the Price of Coke Rises by 5 Percent and the Sales