📚 Learning Guide
Cross Price Elasticity of Demand
medium

Maria notices that the price of coffee has increased significantly. She usually buys coffee and pastries together. After the price increase, she finds herself buying fewer pastries as well. What can be inferred about the relationship between coffee and pastries based on this scenario?

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Choose the Best Answer

A

Coffee and pastries are substitutes, so an increase in coffee price leads to a decrease in pastry demand.

B

Coffee and pastries are complements, so an increase in coffee price leads to a decrease in pastry demand.

C

The price of coffee has no effect on the demand for pastries.

D

The increase in coffee price makes Maria indifferent to purchasing pastries.

Understanding the Answer

Let's break down why this is correct

Answer

In this scenario, we can infer that coffee and pastries are likely complementary goods, meaning they are often consumed together. When the price of coffee goes up, Maria buys less coffee, which leads her to buy fewer pastries as well. This shows that the increase in coffee prices has made her reduce her overall spending on both items. For example, if she usually buys a coffee and a pastry for breakfast, the higher coffee price may cause her to skip the pastry to save money. This relationship is important because it demonstrates how the price change of one good can directly affect the demand for another good that is linked to it.

Detailed Explanation

Coffee and pastries are complements. Other options are incorrect because This answer suggests that coffee and pastries can replace each other; This answer implies that coffee prices do not affect pastry sales.

Key Concepts

Cross Price Elasticity of Demand
Substitutes and Complements
Consumer Behavior
Topic

Cross Price Elasticity of Demand

Difficulty

medium level question

Cognitive Level

understand

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