Question

Consider Coke and Pepsi, two goods that are considered substitutes by consumers. Which of the following provides the most accurate description of the relation between these goods?

a) An increase in the price of Coke will not affect the market demand for Pepsi

b) An increase in the price of Coke leads to a decrease in demand for Pepsi

c) An increase in the price of Coke leads to an increase in demand for Pepsi

d) An increase in the price of Coke leads to a increase in quantity demanded for Pepsi

e) None of the above.

Answer 1

Ans: c) An increase in the price of Coke leads to an increase in demand for Pepsi.

Explanation:

When the cross elasticity of demand is positive then the two goods are called substitute goods . It means when the price of a related good increases then the demand for that good will decrease. As a result , the demand for other related good ( substitute ) will increase. So we can conclude that an increase in the price of Coke leads to an increase in demand for Pepsi becuase these goods are substitute goods.

When the cross elasticity of demand is negative then the two goods are called complementary goods .