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: splishy splashies, flopsicles, and kipples. 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 splishy splashies decreases by 4%, the quantity of flopsicles sold increases by 5% and the quantity of kipples sold decreases by 5%. Your job is to use the cross-price elasticity between splishy splashies 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 splishy splashies and flopsicles, and then between splishy splashies and kipples. In the second column, determine if splishy splashies 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 splishy splashies.Relative to Splishy Splashies Cross-Price Elasticity of Demand Complement or Substitute Flopsicles Kipples

Answer 1

Answer:It is recommended: marketing flopsicles.

Step-by-step explanation:

When the price of splishy splashies decreases by 4%, then quantity of flopsicles sold increases by 5% and the quantity of kipples sold decreases by 5% ie negative. This indicates that splishy splashies and flopsicles are complements and kipples is their substitute.

Cross price elasticity of flopsicles

=

=

= -0.8

Cross price elasticity of kipples

= 0.8

Substitute goods show a positive price elasticity while complements have a negative price elasticity. So we can say that splishy splashies are a substitute for kipples and complements for flopsicles.

I recommend marketing flopsicles.

Answer 2

Step-by-step explanation:

When the price of splishy splashies decreases by 4%, the quantity of flopsicles sold increases by 5% and the quantity of kipples sold decreases by 5%. This indicates that splishy splashies and flopsicles are complements and kipples is their substitute.

Cross price elasticity of flopsicles

=
`(change\ in\ quantity\ demanded)/(change\ in\ price)`

=
`(-4)/(5)`

= -0.8

Cross price elasticity of kipples

=
`(change\ in\ quantity\ demanded)/(change\ in\ price)`

=
`(-4)/(-5)`

= 0.8

Substitute goods show a positive price elasticity while complements have a negative price elasticity. So we can say that splishy splashies are a substitute for kipples and complements for flopsicles.

Complements should be marketed together so I recommend marketing flopsicles with splishy splashies.