A 10 percent increase in the price of soda leads to a 20 percent increase in the quantity of iced tea demanded. What can we conclude from this information?
A) The elasticity of demand for iced tea is 2 and is elastic.
B) The cross-price elasticity of demand for iced tea is -2.
C) The cross-price elasticity of demand for soda is -0.5.
D) The elasticity of demand for soda is 0.5 and is inelastic.

Question

Quizplus · Accepted Answer

The 20% increase in the quantity demanded of iced tea in response to a 10% increase in the price of soda indicates a negative relationship between the two products. Since the percentage change in the quantity demanded of iced tea is proportionally greater than the percentage change in the price of soda, the cross-price elasticity of demand for iced tea is greater than 1 and therefore elastic. The negative sign indicates that the two goods are complements, meaning that the increase in the price of soda leads to an increase in the demand for its substitute, iced tea. Therefore, the correct answer is (B) The cross-price elasticity of demand for iced tea is -2.

A 10 Percent Increase in the Price of Soda Leads