A 10 percent decrease in the price of potato chips leads to a 30 percent increase in the quantity of soda demanded. What can we conclude from this information?
A) The elasticity of demand for soda is 3.
B) The elasticity of demand for potato chips is 3.
C) The cross-price elasticity of demand for soda is -3.
D) The cross-price elasticity of demand for potato chips is -3.

Question

Quizplus · Accepted Answer

This information tells us about the cross-price elasticity of demand between potato chips (whose price decreased by 10%) and soda (whose demand increased by 30%). A negative cross-price elasticity between two goods means that they are complements. The magnitude of the elasticity can be calculated as the percentage change in quantity demanded of soda divided by the percentage change in the price of potato chips. In this case, (30%/10%) gives us a cross-price elasticity of -3, indicating that for every 10% decrease in the price of potato chips, the quantity of soda demanded increases by 30% (a substantial amount), making these two goods complements.

A 10 Percent Decrease in the Price of Potato Chips