Question

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: 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 1%, the quantity of raskels sold decreases by 18% and the quantity of cannies sold increases by 3%. 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 Dummies 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 guy gummies.

Answer 1

Cross price elasticity of demand= % change in quantity demanded of Good Y/% change in price of good x

	Cross price elasticity	Complements or substitutes	Recommend marketing with Guppy Gummies
Raskels	= -18%/-1%= 18	SUBSTITUTES	No
Cannies	=3%/-1%=-3	COMPLEMENTS	Yes

When Cross price elasticity is negative, goods are complements

When Cross price elasticity is positive, goods are substitutes.

Complementary goods are sold together not substitutes.