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, 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 your marketing firm with the following data: When the price of splishy splashies increases by 5%, the quantity of raskels sold decreases by 4% and the quantity of mookies sold increases 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 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 which good you should recommend marketing with splishy splashies.

8. Substitutes, complements, or unrelated? 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 your marketing firm with the following data: When the price of spl shy splashes increases by 5%, the quantity of raskels sold decreases by 4% and the quantity of mookies sold increases by 5%. Your job is to use the cross-price elasticity 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 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 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 Raskels Mookies

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 splishy splashies and raskels

% change in quantity demanded of raskels 4% decrease

% change in price of splishy splashies is 5% increase

Cross price elasticity is = -4/5=-0.8

If the price of splashy splashies increases by 1%, the demand for raskels falls by 0.8%.

Cross elasticity between splishy splashies and mookies.

% change in quantity demanded of mookies increases by 5%

% change in price of splashy splashies is 5% increase.

Cross price elasticity is = 5%/5%=1

If the price of splishy splashies increases by 1%, the quantity demanded of mookies increases by 1%.

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

Relative to splishy splashies Cross price elasticity of demand Complement or substitute Recommend Raskels -0.8 Complement Yes Mookies 1.0 Substitute No Since the cross price elasticity is negative between splishy splashy and raskels, these are complementary goods and can be marketed together.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.