A percent increase in the price of soda leads to a percent increase in the quantity of iced tea demanded. It appears that the cross-price elasticity of demand for iced tea is . Why is it negative and not positive?

This statement is incorrect. The cross-price elasticity of demand (XED) can be calculated using the following formula.

Knowing the formula we can proceed to compute the solution.

Therefore, the cross-price elasticity of demand is 2. That is to say, soda and iced tea are substitute goods. Substitute goods are those goods whose quantity demanded increases when the price of the other good also increases. A negative cross-price elasticity of demand occurs only when the products analyzed are complements. In other words, when the price of a good increases the quantity demand for the second good decreases.