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, raskels, 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 man's marketing firm with the following data:
When the price of splishy splashies decreases by 5%, the quantity of raskels sold increases by 4% and the quantity of mookies sold decreases by 6%. A man's job is to use the cross-price elasticity between splishy splashies and the other goods to determine which goods to a man marketing firm should advertise together.

Complete the first column of the following table by computing the cross-price elasticity between splishy splashies and raskels, and then between splishy splashies and mookies. 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 should be recommended marketing with splishy splashies.

Relative to Splishy Splashies
Cross-Price Elasticity of Demand Complement or Substitute
Raskels
Mookies

Recommend Marketing with Splishy Splashies
Raskels
Mookies

Answer 1

Cross Price Elasticity (Splishy Splashy & Raskels) = -0.8

Cross Price Elasticity (Splishy Splashy & mookies) = 1.2

Mookies are recommended to me marketed with Splishy Splashies.

Step-by-step explanation:

Substitutes are goods that are inter changeable for a want. Complements are goods that are jointly demanded for a want.

Substitutes price & demand are inversely related, cross price elasticity is negative. Complements price & demand are positively related, cross price elasticity is positive.

Cross Price Elasticity Formula = percentage change in demand = % ∆ D

percentage change in price. % ∆ P

Cross Price Elasticity (Splishy Splashy & Raskels) = % ∆ D (raskels

% ∆ P (splishy splash)

= 4/-5 = -0.8

Cross Price Elasticity (Splishy Splashy & mookies) = % ∆ D (mookies)

% ∆ P (splishy splash)

= -6/-5 = 1.2

Cross price Elasticity (Splishy Splashy & Raskels) is negative, so they are substitute goods. Cross Price Elasticity (Splishy Splashy & mookies) is positive, so they are complementary goods.

Splishy Splash & Mookies are complementary goods. So, Mookies are recommended to me marketed with Splishy Splashies.