Question

1. 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, raskels, 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 4%, the quantity of raskels sold decreases by 4% and the quantity of mookies sold increases by 3%. 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 patties and raskels, and then between penguin patties and mookies. In the second column, determine if penguin patties 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 penguin patties. Relative to Penguin Patties Cross-Price Elasticity of Demand Complement or Substitute Recommend Marketing with Penguin Patties Raskels Mookies

Answer 1

CROSS PRICE ELASTICITY OF DEMAND = % change in quantity demanded for Product A / % change in price of product B

Raskels = % change in quantity demanded for raskels / % change in price of penguin patties

= -4 / -4 = 1

Mookies = 3 / -4 = -0.75

Rule:

If cross price elasticity > 0, then the two goods are substitutes

If cross price elasticity = 0, then the two goods are independent

If cross price elasticity < 0, then the two goods are complement

So, we can say based on above rules that:

Raskels and Penguin Patties are Substitutes

Mookies and Penguin Patties are Complements

If two goods are substitutes, we should expect to see consumers purchase more of one good when the price of its substitute increases. This results in a high positive cross price elasticity. The demand for both goods moves in opposite directions of each other.

f the two goods are complements,we should see a price rise in one good cause the demand for both goods to fall. This results in a negative number or negative cross price elasticity. Likewise, if the price fell for one complement, quantity demanded for both goods should increase. The demand for both goods should move in the same direction.

Since Mookies and Penguin Patties are Complements so, they can be advertised together. This is because complement goods can help you earn more if you marketing both of them together. Because people will buy complementary goods together.

Since Raskels and Penguin Patties are Substitutes, they can't be advertised together.

Relative to Penguin Patties	Relative to Penguin Patties
	Cross-Price Elasticity of Demand	Complement or Substitute	Recommend Marketing with Penguin Patties
Raskels	1	Substitute	No
Mookies	-0.75	Complement	Yes