Consider cities that implemented the tax on sugary drinks. What is the cross elasticity of demand for sugary drinks purchased outside of cities with respect to the price of sugary drinks purchased inside cities?
The cross elasticity of demand is ____________ because sugary drinks purchased inside the cities and sugary drinks purchased outside the cities are ____________.
Wrong! - When the price of sugary drinks inside the cities rises, the demand for sugary drinks outside the cities increases. Is the cross elasticity of demand negative or positive? What does the cross elasticity of demand tell us about the relationship between two goods?
Good Job! - When the price of sugary drinks inside the cities rises, the demand for sugary drinks outside the cities increases, so the cross elasticity of demand is positive. When the cross elasticity of demand is positive, the two goods are substitutes.
Sales of sugary drinks fell in five U.S. cities, after they implemented taxes targeting those drinks. On average, prices for sugar-sweetened drinks went up by 33.1% and total expenditure went down by 33%. Expenditure on sugary drinks outside of these cities increased.—npr.org