A 10 percent increase in the price of soda leads to a 20 percent increase in the quantity of iced tea demanded. It appears that:
A) elasticity of demand for soda 0.5 and is inelastic.
B) elasticity of demand for iced tea is 2 and is elastic.
C) cross-price elasticity of demand for soda is -0.5.
D) cross-price elasticity of demand for iced tea is -2.

Question

Quizplus · Accepted Answer

The cross-price elasticity of demand measures the responsiveness of the quantity demanded of one good to a change in the price of another good. Here, a 10% increase in the price of soda leads to a 20% increase in the quantity of iced tea demanded, indicating a cross-price elasticity of 20%/10% = 2. Since the goods are substitutes, the elasticity is positive, so the correct answer is D.

A 10 Percent Increase in the Price of Soda Leads