Question

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, frizzles, and candies. 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 penguin pops increases by 10%, the quantity of frizzles sold decreases by 26% and the quantity of candies sold increases by 14%. 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.

          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, frizzles, and candies. 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 penguin pops increases by 10%, the quantity of frizzles sold decreases by 26% and the quantity of candies sold increases by 14%. 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.

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Added by Adam B.

Principles of Economics

Gregory Mankiw 8th Edition

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Solved by Expert Andrew Davis

08/13/2023

Step 1

The formula for cross-price elasticity of demand is: Cross-price elasticity = (% change in quantity demanded of one good) / (% change in price of another good) Given that the price of penguin pops increases by 10% and the quantity of frizzles sold decreases by Show more…

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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: penguin pops, frizzles, and candies. 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 penguin pops increases by 10%, the quantity of frizzles sold decreases by 26% and the quantity of candies sold increases by 14%. 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.

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Transcript

00:01 So here we're told something about the structure of the business.

00:03 I'm told that 170 ,000 is equal to my total revenue from x, so i know that this is the price of x times the amount of x.

00:11 I also know that 50 ,000 is the revenue from y, which is the price of y times the amount of y we sell.

00:18 The own price elasticity, so i know that minus 1 .5 is the percentage change in x with respect to the percentage change in the price of x, and the cross price elasticity is the percent change in x with respect to the percent change in the price of y.

00:39 This could also be, i think now that i read it a little bit closely, they're being a little bit confusing.

00:45 This should be y and the price of x to do this question, but they didn't really specify, right, which way the cross elasticity is defined.

00:53 So for part a, let's think about the chain reaction from this elasticity.

00:59 Imagine that the price of x goes up.

01:02 This implies that the quantity of x should go down, right, that's the law of demand.

01:06 But we also know that this, it means that the quantity of y is going to go up due to the elasticity, right.

01:17 The elasticity here is positive.

01:19 So here you've got these things going in opposite directions, right.

01:25 Do you see how when the quantity of x is going up, the quantity of y is going down? that's what we mean by substitutes, right...

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