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: 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 20%, the quantity of raskels sold decreases by 22% and the quantity of kipples sold increases by 7%. 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.

Answer 1

Explanation:

The cross-price elasticity formula is:

CPE= Δ%q of good A/ Δ%p of good B

The CPE of penguin patties and raskels is:

CPE= -22%/-20%

CPE= 1.1

A positive CPE means that both good are substitutes; often, penguin patties take the place of raskels. An increase in price of penguin patties will affect positively the quantity demanded for raskels.

The CPE of penguin patties and kipples:

CPE= 7%/-20%

CPE=-0.35

A negative CPE means that both goods are complementary, which means that consumers will likely consume them together. An increase in price of penguin patties will affect negatively de quantity demanded for kipples.

Complementary goods should be advertise together because both could be positively benefited by advertising. If the demand for penguin patties increases, it is probable that the demand for patties increases too. If you advertise substitute goods, people will always prefer one, then the advertising will only be effective or for penguin patties or for raskels.