Suppose I estimate the following demand function for a tv: Q = 400 - 3P +...

Suppose I estimate the following demand function for a tv:

Q = 400 - 3P + 4T + .6A

Where:

Q = quantity demanded in units

P = price in dollars

T = tastes and preferences

A = Advertising expenditures in dollars

We are currently operating at the following values:

A = 10,000

T = 8000

P = 2800

In addition, suppose MC is 2800

Given all this, please answer the following questions:

A. Derive the firm's current demand curve and calculate and interpret the firm's current price elasticity of demand.

B. Given your answer in A, should the firm increase or decrease output in order to maximize profits? Explain and show your work on a well-labeled graph.

C. What is the profit-maximizing output and price? Show and explain all your work and match up your answer to your work in part c.

D. Calculate an "advertising elasticity of demand." Based on this, by what percent should advertise expenditures increase in order to increase sales by 10 percent? Note: work from the original price and output levels, NOT the profit-maximizing levels.

Solutions

Expert Solution

Rahul Sunny answered 1 year ago

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