TB MC Qu. 06-321 We would expect the cross…
Weuld expect the cross elasticity of demand for Pepsi to be greater in relation to other soft drinks than that for soft drinks in general because
Multiple Choice
soft drinks are normal goods.
the income effect always exceeds the substitution effect.
there are more good substitutes for soft drinks as a whole than for Pepsi specifically.
theod substitutes for soft drinks as a whole than for Pepsi specifically.

The cross elasticity of demand measures how the quantity demanded of one good changes in response to a price change in another good. Pepsi specifically competes directly with brands like Coca-Cola and Dr Pepper, creating a high degree of substitutability. Thus, when the price of Pepsi rises, consumers are more likely to switch to another cola, leading to a higher cross elasticity compared to the general category of soft drinks, which might include a wider range of non-cola options.

In essence, if Pepsi’s price creeps up, cola lovers are itching to reach for Coke, but when we look at soft drinks as a whole, that’s a broader category that includes juices, water, and other beverages that may not substitute as closely, leading to a lower cross elasticity. It’s all about how closely related those products are in the consumer’s mind!