Homework (Ch 05) - 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: guppy gumdrops, raskels, 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 gumdrops decreases by 12%, the quantity of raskels sold decreases by 27% and the quantity of kipples sold increases by 3%. Your job is to use the cross-price elasticity between guppy gumdrops 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 gumdrops and raskels, and then between guppy gumdrops and kipples. In the second column, determine if guppy gumdrops 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 gumdrops. Relative to Guppy Gumdrops Cross-Price Elasticity of Demand Complement or Substitute Recommend Marketing with Guppy Gumdrops Raskels KipplesRelative to Guppy Gumdrops Cross-Price Elasticity of Demand Complement or Substitute Recommend Marketing with Guppy Gumdrops Raskels -2.25 X Complement X No V Kipples 0.25 X Substitute X Yes V K Points: 0.33 / 1