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 flopsicles sold increases by 4% and the quantity of mookies sold decreases 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 patties and flopsicles, 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 Recommend Marketing with Penguin Patties Cross-Price Elasticity of Demand Complement or Substitute Flopsicles Mookies

Answer 1

Given  

Percent change in price of penguin patties=-5%

Corresponding change in quantity of flopsicles=+4%

Corresponding change in quantity of mookies=-6%

Cross price elasticity of demand of flopsicles in relation to penguin patties=Percent change in quantity sold/Percent change in price of penguin patties=(+4%)/(-5%)=-0.80

Since coefficient of cross price elasticity of demand of flopsicles is negative. It means that if price of penguin patties decreases, the demand for flopsicles increases and vice versa. It means that penguin patties and flopsicles are complements. Generally, complements are consumed together. Flopsicles and penguin patties can be marketed together.

Cross price elasticity of demand of mookies in relation to penguin patties=Percent change in quantity sold/Percent change in price of penguin patties=(-6%)/(-5%)=1.20

Since coefficient of cross price elasticity of demand of mookies is positive. It means that if price of penguin patties decreases, the demand for mookies decreases and vice versa. It means that penguin patties and mookies are substitutes. Generally, substitutes are not consumed together. Only one is consumed at a time. Mookies and penguin patties cannot be marketed together.'

Findings can be summarized as under :

Relative to Penguin patties
	Cross price elasticity of demand	Compliment/substitutes	Recommend marketing with penguin Patties
Flopsicles	-0.8	Compliment	Yes
Mookies	1.2	Substitutes	No