The cross-price elasticity of demand for Coke with respect to the price of Pepsi has been estimated to be 0.61.If the price of Pepsi falls by 10%,all other things unchanged,the quantity demanded of Coke will:

A) decrease by less than 6.1%.
B) decrease by 6.1%.
C) not change because many people prefer Coke to Pepsi.
D) increase.

Question

Katrina Shields · Accepted Answer

Final Answer : B, Explanation :  The cross-price elasticity of demand (XED) measures the responsiveness of the quantity demanded of one good to a change in the price of another good. A positive value of XED (0.61 in this case) indicates that Coke and Pepsi are substitutes, meaning that an increase in the price of Pepsi would lead some consumers to switch to Coke. Therefore, a decrease in the price of Pepsi (by 10%) would lead some consumers to switch to Pepsi from Coke, reducing the quantity demanded of Coke. The magnitude of the decrease in quantity demanded of Coke is given by the product of the percent change in the price of Pepsi (-10%) and the XED (0.61), which equals -6.1%. Therefore, the quantity demanded of Coke will decrease by 6.1% (option B). Option A is incorrect because a decrease of less than 6.1% implies an XED of less than 0.61, which contradicts the given information. Option C is incorrect because the fact that many people prefer Coke to Pepsi does not affect the XED or the quantity demanded of Coke. Option D is incorrect because a decrease in the price of Pepsi would reduce the quantity demanded of Coke, not increase it.

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