Question

b. 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 pops, fizzles, and kipples. all of these products have been on the market for some time, but, to induce 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 pops increases by 10%, the quantity of fizzles sold increases by 11% and the quantity of kipples sold decreases by 5%. your job is to use the cross - price elasticity between penguin pops 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 pops and fizzles, and then between penguin pops and kipples. in the second column, determine if penguin pops are a complement or a substitute for each of the goods listed. finally, complete the final column by indicating which good you should recommend marketing with penguin pops.

relative to penguin pops

recommendations (enter \y\ for yes and

\ for no) |

	cross - price elasticity of demand	complement or substitute (enter \c\ for complement or \s\ for substitute)
fizzles
kipples

Explanation:

Step1: Define cross-price elasticity formula

Cross-price elasticity of demand is calculated as:
$$E_{xy} = \frac{\% \Delta Q_y}{\% \Delta P_x}$$
where $\% \Delta Q_y$ is the percentage change in quantity of good y, and $\% \Delta P_x$ is the percentage change in price of good x.

Step2: Calculate for Frizzles

Plug in Frizzles' quantity change and Pops' price change:
$$E_{pops,frizzles} = \frac{11\%}{10\%} = 1.1$$
Positive elasticity means substitutes. Recommend no (N) pairing.

Step3: Calculate for Kipples

Plug in Kipples' quantity change and Pops' price change:
$$E_{pops,kipples} = \frac{-5\%}{10\%} = -0.5$$
Negative elasticity means complements. Recommend yes (Y) pairing.

Answer:

Relative to Penguin Pops	Cross-Price Elasticity of Demand	Complement or Substitute (Enter "1" for Complement or "2" for Substitute)	Recommendations (Enter "Y" for Yes and "N" for No)
Kipples	-0.5	1	Y