Run-of-the-Mills provides your marketing firm with the following dа ta: When the price of guppy gummies decreases by 4%, the quantity of flopsicles sold decreases by 4% and the quantity of mookies sold increases by 3%. 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.

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19 March, 17:30

Run-of-the-Mills provides your marketing firm with the following dа ta: When the price of guppy gummies decreases by 4%, the quantity of flopsicles sold decreases by 4% and the quantity of mookies sold increases by 3%. 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.

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Maverick Roth · Answer 1

Guppy gummies and mookies should be advertise together.

Explanation:

The cross-price elasticity formula is:

CPE = Δ%q of good A / Δ%p of good B

The CPE of Guppy gummies and flopsicles is:

CPE = - 4%/-4%

CPE = 1

If the CPE is positive, then both goods are substitutes, which means that an increase in price of on good will affect positively the quantity demanded for the other good.

The CPE of Guppy gummies and mookies:

CPE = 3%/-4%

CPE=-0.75

If the CPE is negative, then both goods are complementary, which means that an increase in price of one good will affect negatively de quantity demanded for the other good.

You should advertise complementary goods together because it is likely that people consume both at the same time. If the demand for good gummies increases, it is probable that the demand for mookies increases too. Which means that Guppy gummies and mookies should be advertise together. If you advertise substitute goods (Guppy gummies and flopsicles), people will always prefer one, then the advertising will only be effective for one of the good but not for both.