Question

Run-of-the-Mills provides your marketing firm with the following data: When the price of guppy gummies increases by 5%, the quantity of raskels sold decreases by 4% and the quantity of kipples sold increases by 5%. 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.

Answer 1

Answer:

Guppy gummies and Raskels

Explanation:

The relevant elasticity here is the cross-price elasticity of demand. Cross-price elasticity of demand or simply cross elasticity of demand measures the degree of responsiveness of the quantity demanded of a product as a result of change in the price of another product, ll other things being equal.

The formula for calculating is stated as follows:

$E_{c} = \frac{Percentage change in quantity demand of good X}{Percentage change in the price of good Y}$

     = %Δ in the quantity of X ÷ %Δ in the Price of good Y

We can use the formula to determine the elasticity of the goods as follows:

1. Cross elasticity of Guppy gummies and Raskels (Ecgr)

%Δ in the price of guppy gummies = 5%

%Δ in the quantity of raskels = = - 4%

Ecgr = - 4% / 5% = - 0.80

1. Cross elasticity of Guppy gummies and Kipples (Ecgk)

%Δ in the price of guppy gummies = 5%

%Δ in the quantity of  Kipples = 5%

Ecgk = 5% / 5% = 1.00

Decision Rule:

When cross elasticity is negative, it implies the two products are complements. In this case, Guppy gummies and Raskels are complements.

When cross elasticity is positive, it implies the two products are substitutes. In this case, Guppy gummies and Kipples are substitutes.

Decision:

Since, Guppy gummies and Raskels are complements while, Guppy gummies and Kipples are substitutes; therefore, the marketing firm should advertise Guppy gummies and Raskels that are compliments together. This is because increase in the sales of one will lead to an increase in the sales of the other one.