Question

A 10 percent increase in the price of soda leads to a 20 percent increase in...

A 10 percent increase in the price of soda leads to a 20 percent increase in the quantity of iced tea demanded. It appears that:

a) elasticity of demand for soda 0.5 and is inelastic.

b) elasticity of demand for iced tea is 2 and is elastic.

c) cross-price elasticity of demand for soda is -0.5.

d) cross-price elasticity of demand for iced tea is 2.

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Answer #1

Option D

  • Cross price elasticity of demand refers to the responsiveness of a good's demand with respect to the changes in the price of another good and It is calculated as the percentage in quality of a good divided by percentage in price of another good.
  • Here it is said that the quantity of iced tea demanded = 20% and the price of soda = 10%.
  • The price elasticity of demand is given by,

PED = % Q / % P

= 20 / 10

= 2.//

Therfore, the cross price elasticity of demand for iced tea is 2.

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