Question

15. 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, flopsicles, 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 increases by 4%, the quantity of flopsicles sold increases by 1% and the quantity of cannies sold decreases by 5%. 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 gummus and flopsicles, and then between guppy gummies 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 guppy gummies. Relative to Guppy Gummies Cross-Price Elasticity of Demand Complement or Substitute Recommend Marketing with Guppy Gummies Flopsicles Cannies Grade It Now Save & Continue Continue without saving

Answer 1

15. Cross price elasticity between guppy gummies and flopsicies.

Elasticity = change in quantity demanded of flopsicies / change in price of guppy gummies

= 1/4

= 0.25

Between guppy gummies and cannies

Elasticity = -5/4

= -1.25

It means that guppy gummies and flopsicies are substitutes wheras guppy gummies and cannies are complements. When cross elasticity is positive, it means it is substitutes. When cross elasticity is negative, it indicates that the goods are compliments.

It should recommend marketing guppy gummies and cannies together as they are compliments or jointly used.

16. Elasticity = % change in quantity/ % change in price

% change in supply = 19-10/(19+10)÷2

= 9/29÷2

= 9/14.5

= 0.62

% change in price = 60-35/(60+35)÷2

= 25/95÷2

= 25/ 47.5

= 0.526

Elasticity of supply = 0.62/0.52

= 1.19

It means that Janet's supply over wage rate is elastic since elasticity is greater than 1. It means when wage increases, Janet's responsiveness is greater than the increase in wage rate.