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: penguin patties, flopsicles, 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 penguin patties decreases by 5%, the quantity of flopsides sold decreases by 4% and the quantity of mookies sold increases by 6%. 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 pattes and foosides, and then beveen penguin patties and mookles. In the second column, determine if penguin parties are complement to or 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 Flopsicles Mookies

Answer 1

Flopsicles - cross price elasticity = 4/5= 0.8, substitutes, no

Mookies - cross price elasticity = -6/5= -1.2, complements, yes