The cross-price elasticity of demand equals −2.5, and these goods are complements.
Cross-price elasticity is a measuring tool to determine how sensitive the demand for a product is over a shift in a corresponding product price
Cross price elasticity = (percentage change in the demand of product A) ÷ (percentage change of the price of product B)
Since, a 2 percent increase in the price of bologna results in a 5 percent decrease in the demand for cheese, the cross-price elasticity can be calculated by substituting these values in the equation as follows;
Since the increase in price results in decreased demand, therefore, it will be calculated as a negative value
Cross price elasticity = (-5%) ÷ 2% = -2.5
An object used in combination with another product or service is termed a complementary good. Since the change in the price of bologna results in a decrease in the demand for cheese therefore these goods can be termed as complements.
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