Pepsi One is a close substitute for Diet Coke. When Pepsi introduced Pepsi One, the price elasticity of demand for Diet Coke ______ and Coke's ability to raise revenues through price increases ______.
A)increased; was reduced
B)increased; increased
C)decreased; was reduced
D)had no effect; was reduced

Question

Quizplus · Accepted Answer

Pepsi One is a close substitute for Diet Coke, which would increase the price elasticity of demand for Diet Coke. When the price elasticity of demand is higher, consumers are more likely to switch to substitutes like Pepsi One when the price of Diet Coke increases. Therefore, Coke's ability to raise revenues through price increases would be reduced.

Pepsi One Is a Close Substitute for Diet Coke