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Homework answers / question archive / 8
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, 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 1%, the quantity of raskels sold decreases by 18% 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.
When the price of Penguin petties decreases 1%, then the quantity of raskels decreases 18%.
Cross price elasticity= % change in quantity raskels / % change in quantity penguine patties
= -18%/ 1%
= -18%
Penguine patties and raskels are complements, because the sign of cross price elasticity is negative.
When the price of Penguin petties decreases 1%, then the quantity of mookies decreases 3%.
Cross price elasticity= % change in quantity mookies / % change in quantity penguine patties
= 18%/ 3%
= 6%
Penguine patties and mookies are substitutes, because the sign of cross price elasticity is positive.
(TABLE ATTACHED)
