Question

We would expect the cross elasticity of demand between Pepsi and Coke to be:

1) Positive
2) Negative
3) Zero
4) Cannot be determined

Answer 1

The cross elasticity of demand between Pepsi and Coke is expected to be positive because they are substitute goods, and an increase in the price of one should lead to an increase in the quantity demanded of the other.

Step-by-step explanation:

We would expect the cross elasticity of demand between Pepsi and Coke to be positive. This is because they are substitute goods and an increase in the price of one (say Pepsi) will likely result in an increase in the quantity demanded of the other (Coke). The formula for cross-price elasticity is % change in quantity demanded of good A / % change in price of good B. Therefore, if the price of Pepsi goes up, people might buy more Coke instead, increasing Coke's quantity demanded.

The cross-price elasticity of demand represents the responsiveness of the quantity demanded of one good when a different good's price changes. In the case of Pepsi and Coke, if the price elasticity is greater than one, it indicates a high responsiveness to changes in price, meaning they are strong substitutes. However, we interpret elasticities as positive numbers, and when discussing the relationship between two substitute goods, such as Pepsi and Coke, we typically find the cross-price elasticity to be a positive number.