We would expect the cross elasticity of demand for Pepsi to be greater in relation to other soft drinks than that for soft drinks in general because
A)soft drinks are normal goods.
B)the income effect always exceeds the substitution effect.
C)there are fewer good substitutes for soft drinks as a whole than for Pepsi specifically.
D)there are more good substitutes for soft drinks as a whole than for Pepsi specifically.

Question

Quizplus · Accepted Answer

The cross elasticity of demand measures how the quantity demanded of one good responds to a change in the price of another good. For Pepsi, there are many other specific soft drinks (like Coca-Cola) that can serve as close substitutes, making its cross elasticity of demand higher in relation to other specific soft drinks. In contrast, when considering soft drinks as a whole category, there are fewer substitutes outside this category, making the cross elasticity of demand lower for soft drinks in general compared to a specific brand like Pepsi.

We Would Expect the Cross Elasticity of Demand for Pepsi