Question

You work for a marketing firm that has just landed a contract with Run-of-the-Mills to help them promote three of their products: penguin patties, frizzles, and mookies. All of these products have been on the market for some time, but, to entice better sales, Run-of-the-Mills wants to try a new advertisement that will market two of the products that consumers will likely consume together. As a former economics student, you know that complements are typically consumed together while substitutes can take the place of other goods. Run-of-the-Mills provides your marketing firm with the following data: When the price of penguin patties decreases by 5%, the quantity of frizzles sold increases by 4% and the quantity of mookies sold decreases by 5%. Your job is to use the cross-price elasticity between penguin patties and the other goods to determine which goods your marketing firm should advertise together.

Complete the first column of the following table by computing the cross-price elasticity between penguin patties and raskels, and then between penguin patties and kipples. In the second column, determine if penguin patties are a complement to or a substitute for each of the goods listed. Finally, complete the final column by indicating which good you should recommend marketing with penguin patties.


Relative to Splishy Splashies
Cross-Price Elasticity of Demand Complement or Substitute Recommend Marketing with Splishy Splashies

Flopsicles
Kipples

Answer 1

Answer:

Explanation:

a) Data and Calculations:

Decrease in the price of penguin patties = 5%

Quantity of frizzles sold increase by 4%

Quantity of mookies sold decrease by 5%

Cross-price elasticity of frizzles relative to penguin patties = 4%/-5% = -0.8

Cross-price elasticity of mookies relative to penguin patties = -5%/-5% = 1

Relative to Frizzles  Cross-Price                 Complement   Recommend

and Mookie's          Elasticity of Demand   or Substitute     Marketing

Frizzles                   -0.8 (4%/-5%)                Complement    with patties

Mookie's                  1 (-5%/-5%)                  Substitute          without patties

b) The cross-price elasticity measurements for penguin patties and frizzles and Mookie’s are calculated by taking the percentage changes in the quantity demanded of frizzles and Mookie’s and dividing them by the percentage change in the price of the penguin patties. Complementary goods have a negative cross- price elasticity because as the price of penguin patties decreases by 5%, the demand for the frizzles increases by 4%. Substitute goods have a positive cross-price elasticity because as the price of penguin patties decreases by 5%, the demand for the other good decreases by 5%.