The recommend marketing with penguin patties options are (yes or no) for both 8.

Question

The recommend marketing with penguin patties options are (yes or no) for both

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: penguin patties, raskels, and kipples. 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 penguin patties decreases by 5%, the quantity of raskels sold increases by 4% and the quantity of kipples sold decreases by 5%. Your job is to use the cross-price elasticity between penguin patties 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 penguin patties and raskels, and then between penguin patties and kipples. In the second column, determine if penguin patties 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 penguin patties. Relative to Penguin Patties Cross-Price Elasticity of Demand Complement or Substitute Recommend Marketing with Penguin Patties Raskels Kipples

Explanation / Answer

Cross price elasticity is the percentage change in quantity demanded of a good for a per unit percentage change in price of a related good.

Let X and Y be two goods related to each other.

Cross Price Elasticity of X and Y = % change in quantity demanded of X / % change in price of Y.

Cross price elasticity = 4% / 5% = 0.8.

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

In case of complementary goods a decrease in price of good raises the quantity demanded of both the related goods.

In case of substitute goods an increase in price of a good raises the quantity demanded of the related good.

When the price of penguin patties decreases the quantity demanded of penguin patties increases and at the same time the quantity demanded of raskels increases. So penguin patties and raskels are complementary goods.

Looking in the similar way, a decrease in price of penguin patties raises the quantity demanded of penguin patties and on the other hand there is decrease in the demand for kipples. Thus, penguin patties and kipples are substitute goods.

Since the company wants to try an advertisement for the products that the consumer will like to consume together, the marketing firm should advertise penguin patties and raskels together as they are complementary goods.

Cross price

Elasticity

Complements or

Substitutes

Recommend marketing with

Penguin patties

Goods

Cross price

Elasticity

Complements or

Substitutes

Recommend marketing with

Penguin patties

Raskels 0.8 Complements Yes Kipples 1 Substitutes No

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