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, frizzles, and cannies. 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 5%, the quantity of frizzles sold increases by 4% and the quantity of cannies 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 Recommend Marketing with Splishy Splashies

Flopsicles
Kipples

Answer 1

cross-price elasticity formula = % change in quantity demanded of good X / % change in price of good Y

cross-price elasticity of demand between splishy splashies and frizzles (or is it flopsicles?) = 4% / -5% = -0.8, complement goods. When the cross price elasticity is negative, then the goods complement each other.

cross-price elasticity of demand between splishy splashies and cannies (or is it kippies?) = -5% / -5% = 1, substitute goods. When the cross price elasticity is positive, then the goods substitute each other.

If you are about to launch a marketing campaign for splishy splashies, then you should include frizzles in it.