Question

Assume that a 2 percent increase in the price of bologna causes a 5 percent decrease in the demand for cheese. What is the cross-price elasticity of demand between the two goods, and how are these goods related?


Cross-price elasticity of demand equals
, and these goods are complements.


a

Cross-price elasticity of demand equals
, and these goods are substitutes.


b

Cross-price elasticity of demand equals
, and these goods are complements.


c

Cross-price elasticity of demand equals
, and these goods are substitutes.


d

Cross-price elasticity of demand equals
, and these goods are substitutes.

Answer 1

Cross-price elasticity = (%ΔQ_d_cheese) / (%ΔP_bologna) = (-5%) / (2%) = -2.5.

Because the cross-price elasticity is negative, the goods are complements.