You wark for a marketing firm that has just landed a contract with Run-of-the-Mi

Question

You wark for a marketing firm that has just landed a contract with Run-of-the-Mills to help them promote three of their products: raskels, and cannies. All of these products have been on the market for some time, but, to entice better sales, Run-of-the-Mils wants to try a new advertisement that will market two of the products that consumers will likely consume together. As a former economies student, you know thet complemerts are typically consumed together while substitutes can take the place of other goods guppy gurnmies, Run-of-the-Hills provides your marketing firm with the folowing data: when the price of guppy gummies decreases by 4%, the quantity of raskels sold decreases by 4% and the quantity of cannies sold increases by 3%. Your job is to use the ross-price elastCity between guppy gumnes 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 guppy gummies and raskela, and then betiween guppy oummies and cannies. In the second column, determine if guppy summies wre e complement to or a substitute for each of the goods lsted. Finaly complete the final column by indicating which good you should recammend mowrketing with guppy sumnies Relative to Guppy Gummies Cross-Price Elasticity of Demand Complement or Substitute Recommend Marketing with Guppy Gummies Raskels Cannies

Explanation / Answer

When the price of guppy gummies decreases by 4%, the quantity of raskets sold decreases by 4% and the quantity of cannies sold increases by 3%.

As we know that when the price of the good deceases,he quantity demanded of he substitute good fall while the quantity of complementary good will rise.

Her as the Guppy gummies price falls, quantity of raskets sold decreses, it means they are substitute good and Gummy gummies and cannies are complements to each other.

One other way also to find substitute and complements is cross price elasticity.  

Cross price elasticity of demand = % change in quantity demanded of good 1/ % change in price of good 2

here good 2 is guppy gummies.

- Rasket :

Cross price elasticity = - 4% / - 4% = 1

When cross price elasticity is positive, it means the goods are subtitutes of one another.

So we do not recommend rasket marketing with guppy gummies.

Cannies:

Cross price elasticity = 3% / -4% = -0.75

When cross price elasticity is negative, it means the goods are complements of one another.

So we recommend Cannies marketing with guppy gummies.

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