The cross elasticity of demand between Coca-Cola and Pepsi-Cola is

• A. positive, that is Coke and Pepsi are complements.
• B. negative, that is Coke and Pepsi are complements.
• C. positive, that is Coke and Pepsi are substitutes.
• D. negative, that is Coke and Pepsi are substitutes.

Answer: (C)

Cross elasticity of demand shows how the quantity of one good responds to the price change of another. Coca‑Cola and Pepsi are close substitutes, so when the price of Pepsi rises, some people switch to Coca‑Cola, increasing the amount of Coca‑Cola demanded. This makes the cross‑price elasticity positive. A positive value signals substitutes, while a negative value would indicate complements (where a rise in Pepsi’s price would reduce Coke demand), and a value around zero would mean the goods are unrelated. So the cross elasticity between Coca‑Cola and Pepsi is positive, reflecting their substitutability.