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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: splishy splashies, flopsicles, 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 splishy splashies decreases by 4%, the quantity of flopsicles sold decreases by 4% and the quantity of kipples sold increases by 3%. Your job is to use the cross-price elasticity between splishy splashies 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 splishy splashies and flopsicles, and then between splishy splashies and kipples. In the second column, determine if splishy splashies 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 splishy splashies. Relative to Splishy Splashies Cross-Price Elasticity of Demand Complement or Substitute Recommend Marketing with Splishy Splashies Flopsicles KipplesData collected from the economy of Cardtown reveals that a 14% decrease in income leads to the following changes: . An 11% increase in the quantity of blats demanded . A 2% decrease in the quantity of flops demanded . A 27% decrease in the quantity of sniks demanded Compute the income elasticity of demand for each of the goods described, and select the appropriate value in the following table. Then indicate whether the income elasticity for each good indicates that it is a normal good or an inferior good. Hint: Be careful to keep track of the direction of change. The sign of the income elasticity of demand can be positive or negative, and the sign confers important information. Good Income Elasticity of Demand Normal or Inferior Good Blats Flops Sniks Which of the following three goods is most likely to be classified as a luxury good? Sniks Flops BlatsThe following graph shows the daily demand curve for bikes in Ottawa. Use the green rectangle (triangle symbols) to compute total revenue at various prices along the demand curve. Note: You will not be graded on any changes made to this graph. 300 275 250 Total Revenue 225 200 175 XA PRICE (Dollars per bike) 150 125 100 75 25 Demand 10 20 30 40 50 60 70 80 90 100 110 120 QUANTITY (Bikes)On the following graph, use the green point (triangle symbol) to plot the annual total revenue when the market price is $50, $75, $100, $125, $150, $175, and $200 per bike. 10600 9800 Total Revenue 9000 B200 7400 TOTAL REVENUE (Dollars) 6600 5800 5000 4200 3400 0 25 50 75 100 125 150 175 200 225 250 275 300 PRICE (Dollars per bike) According to the midpoint method, the price elasticity of demand between points A and B is approximatelySuppose the price of bikes is currently $125 per bike, shown as point B on the initial graph. Because the demand between points A and B is , a $25-per-bike increase in price will lead to in total revenue per day. In general, in order for a price decrease to cause a decrease in total revenue, demand must be
