A snack company’s data analysts have estimated the following elasticities for sales of the firm’s products....

A snack company’s data analysts have estimated the following elasticities for sales of the firm’s products. Price elasticity is –2.5. Income elasticity is –0.8. Cross-price elasticity with chocolate bars is +0.5. Advertising elasticity is +0.8. Marginal cost is $6.

i) What is the optimal profit margin (P – MC)/P in percent?

ii) What is the optimal price?

iii) If the price of chocolate bars increases by 10%, by how much do the sales of the company change? (Pay attention to the right sign.)

iv) If the price of chocolate bars increases by 10%, and consumer incomes decrease by 5% at the same time, by how much do the sales of the company change? (Pay attention to the right sign.)

v) If the firm wants to achieve 20% sales growth, by how much does it need to increase its advertising expenditure?

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Expert Solution

Rahul Sunny answered 1 year ago

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