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Coffee and tea are substitute goods, according to the source's example. What sign does their cross-price elasticity of demand have, and what happens to tea demand if coffee prices rise?
APositive; a higher coffee price means a smaller quantity of tea consumed
BZero; coffee prices have no effect on tea demand
CPositive; a higher coffee price means a greater quantity of tea consumed
DNegative; a higher coffee price means a smaller quantity of tea consumed
Answer & Solution
Correct answer: C. Positive; a higher coffee price means a greater quantity of tea consumed
1. Coffee and tea are given as an example of substitute goods.
2. Substitute goods have a positive cross-price elasticity of demand.
3. A higher price for coffee makes tea comparatively cheaper, so consumers switch toward buying more tea.
4. A negative cross-price elasticity instead describes complement goods, not substitutes like these.
_Source: OpenStax Principles of Microeconomics for AP Courses (CC BY 4.0), Ch 5 "Elasticity", section 5.4 | Elasticity in Areas Other Than Price_
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