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 increases by 5%, the quantity of raskels sold decreases by 4% and the quantity of cannies sold increases 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 gummies and raskels, 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.

Answer 1

1. Cross price elasticity of demand:

Raskels: -5%

Cannies: 4%

2.complement or substitute

Raskels- Complement. As the price of gummies increased, the quantity demanded of gummies decreased and also the quantity demanded of raksel decreased indicating that both are complements to each other.

Cannies: substitute. As the price of gummies increased, quantity demanded of gummies decreased. People substitute gummies with cannies and consequently, the quantity demanded of cannies increase.

3. Recommend marketing with Guppy Gummies

Raskels: Yes. As they are complements and the price effect with be inter related to each other

Cannies: No, as they are substitues, the price effect work in the opposite direction.

Thanks!