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 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 4%, the quantity of frizzles sold decreases by 5% and the quantity of mookies sold increases by 3%. 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 frizzles, 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 Recommend Marketing with Splishy Splashies Cross-Price Elasticity of Demand Complement or Substitute Frizzles Mookies

Answer 1

Answer:

Splishy Splashy & Frizzles are substitute goods.

Splishy Splashy & Frizzles are complementary good, so frizzles is recommended to be marketed with splishy splashy

Explanation:

Substitute goods can be inter change - ably used to satisfy a particular want. Their price & demand are directly related, as price rise of one good makes other relatively good cheaper & its demand increases.

Complementary goods are jointly used to satisfy a particular want. Their price & demand is inversely related, as price rise of one good makes entire product combination expensive & other good's demand decreases.

Cross Price Elasticity :-

% change in quantity of a good / % change in price of other good

As substitutes price & demand are directly related, their cross price elasticity is positive. As complements price & demand are inversely related, their cross price elasticity is negative.

GIVEN : When the price of splishy splashies increases by 4%

• The quantity of frizzles sold decreases by 5%
• The quantity of mookies sold increases by 3%

Cross Price Elasticity [Splishy Splashies, frizzles] = - 5 / 4 = -1.25 [Negative] So these are substitutes  

Cross Price Elasticity [splishy splashies & mookies] = 3/ 4 = 0.75 [Positive] So these are complements

Hence, Mookies are recommended to be marketed with splishy splashies