Question

In September 2006, the Food and Drug Administration recommended that Americans avoid eating bagged raw spinach in the wake of an outbreak of E. coli bacteria. Following this recommendation, the food industry looked at alternatives and many turned to arugula. One Chicago distributor claimed, "The sale of the stuff has gone through the roof." Based on this information

A. arugula is a normal good while raw spinach is an inferior good.B. the cross-price elasticity between arugula and spinach is negative.C. the cross-price elasticity between arugula and spinach is positiveD. the price elasticity of arugula is positive while the price elasticity of spinach falls to zero.

Answer 1

The correct answer is option C.

Step-by-step explanation:

The Food and Drug Administration recommended that Americans avoid eating bagged raw spinach in the wake of an outbreak of E. coli bacteria. The consumers turned to arugula. This means that both are substitute goods.

Substitute goods have positive cross-price elasticity. This implies that an increase in the price of a good will lead to an increase in the demand for its substitute. This is because consumers always prefer a cheaper substitute.