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, frizzles, and kipples. 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 decreases by 4%, the quantity of frizzles sold decreases by 4% and the quantity of kipples sold increases by 3%. 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 frizzles, and then between guppy gummies and kipples. 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 Recommend Marketing with Guppy Gummies Cross-Price Elasticity of Demand Complement or Substitute Frizzles ? Complement / Substitude Yes / No Kipples ? Complement / Substitude Yes / No

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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, frizzles, and kipples. 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 decreases by 4%, the quantity of frizzles sold decreases by 4% and the quantity of kipples sold increases by 3%. 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 frizzles, and then between guppy gummies and kipples. 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	Recommend Marketing with Guppy Gummies
Cross-Price Elasticity of Demand	Complement or Substitute
Frizzles ?	Complement / Substitude	Yes / No
Kipples ?	Complement / Substitude	Yes / No

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