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

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. Al 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 splashes increases by 4%, the quantity of frizzies sold increases by 5% and the quantity of cannies sold decreases by 5%. Your job is to use the cross-price elasti ty between splishy splashes 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 frizzies, and then between splishy splashies and cannies. 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 Frizzles Cannies Grade It Now Save & Continue

Explanation / Answer

Answer:

                            Relative to splishy Splashies

                      

                       Cross –price elasticity

complementary or substitute

Recommend marketing with splishy splashies

Frizzles

1.25

(E = % change in quantity of frizzles / % change in prices of splishy splashies

= 5/4 = 1.25)

Substitute (as quantity demanded of Frizzles has increased due to increase in prices of splishy splashies)

Yes

(will recommend for marketing with splishy splashies)

Cannies

1

(E = % change in quantity of cannies / % change in prices of splishy splashies

= 5/5 =1)

Complementary (as quantity demanded of Cannies has decreased with the increase in price of splishy splashies)

No

(will not recommend for marketing with splishy splashies)

*we don’t recommend marketing of complementary good because if price of a commodity increases the demand for its complementary decreases so there will be no use of marketing and if we recommend substitute commodity than with the increase in the price of a commodity demand for its substitutes will increase and marketing will further increase its demand among consumers.

                            Relative to splishy Splashies

                      

                       Cross –price elasticity

complementary or substitute

Recommend marketing with splishy splashies

Frizzles

1.25

(E = % change in quantity of frizzles / % change in prices of splishy splashies

= 5/4 = 1.25)

Substitute (as quantity demanded of Frizzles has increased due to increase in prices of splishy splashies)

Yes

(will recommend for marketing with splishy splashies)

Cannies

1

(E = % change in quantity of cannies / % change in prices of splishy splashies

= 5/5 =1)

Complementary (as quantity demanded of Cannies has decreased with the increase in price of splishy splashies)

No

(will not recommend for marketing with splishy splashies)

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