Recall that the cross price elasticity is a measure of how demand for one good changes when the price of some other related good changes. By related we mean either a complement or a substitute; therefore, only (d) or (e) could be correct.

2. The cross price elasticity between two products is found to be -1/2. From this you know that the two products are:
  1. normal. Normal goods are those with income elasticities that are positive. Whether a good is normal or inferior has nothing to do with cross price elasticity.
  2. inferior. Inferior goods are those with income elasticities that are negative. Whether a good is normal or inferior has nothing to do with cross price elasticity.
  3. necessities. Necessities are goods with income elasticities that are positive, but less than one. Again, having nothing to do with cross price elasticity.
  4. complements. If the price of a good increases, sales fall for goods that are considered complements (goods that are consumed together); implying a negative cross price elasticity.
  5. substitutes. If the price of a good increases, sales increase for goods that are considered substitutes; implying a positive cross price elasticity.
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