If consumers find that cola and iced tea are good substitutes, then it is likely that:

If consumers find that cola and iced tea are good substitutes, then it is likely that:

a. the goods’ income elasticities are less than zero.

b. the goods’ price elasticities of demand are less than one.

c. the goods’ cross price elasticities are greater than zero.

Answer: c. the goods’ cross price elasticities are greater than zero.

The case of cola and iced tea being a close substitute just means that when people realize that cola and iced tea can be substitutive goods, then this means that the law of demand dictates that when the price of one good—say cola, then the demand for the other good—Iced tea, then the demand goes up. This is because consumers will shift to the cheaper product which, in this case is, the water being sold by the competitors. Cross price elasticity establishes the extent of proportional reactions of the demands for one product in relation to changes in the price of another product. Cross elasticity of demand is given by: percentage change in Quantity demanded of a product = percentage change in price of another product: if two products are related in such a way that the increase in price of one product leads to an increase in the demand for the other product, then cross elasticity of that two products will be positive. Therefore, if cola and iced tea are related products and also if they are substitutes we should find that their cross price elasticity values are more than zero.