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: guppy gummies, raskels, 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 guppy gummies decreases by 5%, the quantity of raskels sold increases by 4% and the quantity of cannes sold decreases by 6%. Your job is to use the cross-price elasticity between guppy gummies 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 raskels, and then between guppy gummies and cannies. In the second column, determine if guppy gummies 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 guppy gummies

Explanation / Answer

Cross price elasticity is calculated by dividing the % change in quantity demanded of good A by the % change in price of good B.

Cross elasticity between guppy gummies and raskels

% change in quantity demanded of raskels 4%

% change in price of guppy gummies is 5% decrease

Cross price elasticity is = 4/-5=-0.8 (negative)

If the price of guppy gummies increases by 1%, the demand for raskels falls by 0.8%.

Cross elasticity between guppy gummies and cannies

% change in quantity demanded of cannies = -6%

% change in price of guppy gummies is 5% decrease

Cross price elasticity is = -6%/-5%=1.2

If the price of guppy gummies increases by 1%, the quantity demanded of cannies increase by 1.2%.

A negative cross elasticity denotes two products that are complements, while a positive cross elasticity denotes two substitute products.

Relative to guppy gummies Cross price elasticity of demand Complement or substitute Recommend Raskels -0.8 Complement Yes Cannies 1.2 Substitute No Since the cross price elasticity is negative between guppy gummies and raskels, these are complementary goods and can be marketed together.

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