When the price of a bagel rises from $0.45 to $0.65, the quantity of cream cheese demanded falls from 12,000 to 10,000 ounces per year. Use the midpoint formula to calculate the cross-price elasticity between bagels and cream cheese
What does the sign imply about the relationship between these two goods?
percentage change in quantity of cream cheese demanded = (10,000-12,000)/11,000 = -2,000/11,000 = -18.2
percentage change in the price of a bagel = ($0.65 - $0.45)/$0.55 = 0.20/0.55 =
36.4 . Therefore, the cross price elasticity = -18.2/36.4 = -0.5
Because the cross-price elasticity is negative, this implies that the two goods are complements.
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