Question

Diet Coke is a close substitute for Diet Pepsi. When Coca-Cola introduced Diet Coke in 1982, the price elasticity of demand for Diet Pepsi ______ and PepsiCo's ability to raise revenues through price increases ______.

Answer 1

Answer:

The elasticity of Diet Pepsi rose, and its ability to raise revenues through price increases fell.

Explanation:

When a good has very close substitutes, like Diet Pepsi does with respect to Diet Coke, said good has a elastic price elasticity of demand, because the quantity demanded of it falls proportionally more than an increase in price since consumers turn to the substitute good when said good becomes more expensive.

If the price of Diet Pepsi rises, people can simply buy Diet Coke, potentially reducing revenue for Pepsi even more, despite the price increases.