Question

Run-of-the-Mills provides your marketing firm with the following data: When the price of guppy gummies decreases by 5%, the quantity of frizzles sold increases by 4% and the quantity of mookies sold decreases by 6%. 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.

Answer 1

Answer) cross-price elasticity between guppy gummies and frizles

= % change in quantity demanded of frizles / % change in price of guppy gummies = 4 / (-5) = - 0.8

In economics, a complementary good or complement is a good with a negative cross elasticity of demand. This means a good's demand is increased when the price of another good is decreased. that is what happening in this case. when the price of guppy gummies decreasing , quantity demanded of frizles increasing.

cross-price elasticity between guppy gummies and mookies:-

= % change in quantity demanded of mookies / % change in price of guppy gummies = (-6) / (-5) = 1.2

In economics, a substitute good or a substitute is a good with a positive cross elasticity of demand.This means a good's demand is decreased when the price of another good is decreased. that is what happening in this case. when the price of guppy gummies decreasing , quantity demanded of mookies also decreasing.

Thus, firm should advertise the complementary goods together i.e. Guppy gummies and frizzles.