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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 increases by 2%, the quantity of raskels sold increases by 6% and the quantity of mookies sold decreases by 1%. 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.
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Cross price elasticity = % change in quantity of Raskels/% change in price of PP
= 6/2 = 3 as it is positive so,the goods are substitutes so the marketing is not recommended
Cross price elasticity= % change in quantity of Mookies/% change in price of PP
= -1/2 = -0.5 as it is negative so the goods are complements so the marketing is recommended
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Relative to Penguin Patties |
Recommend Marketing with Penguin Patties |
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Cross-Price Elasticity of Demand |
Complement or Substitute |
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| Raskels | 3 | Substitutes | No |
| Mookies | -0.5 | Complementary | Yes |
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