Question

In: Economics

A colleague of yours from the GIMPA School of Technology has decided to venture into Sobolo...

A colleague of yours from the GIMPA School of Technology has decided to venture into Sobolo production and as a student of Managerial Economics, he/she has pleaded with you to help boost demand and revenue. You estimated that the demand equation for his or her Sobolo is: ??=50−0.5??+0.2?+0.5???+1.25? where Qs is the number of 500ml bottles of Sobolo demanded, Ps is the price he/she charges per 500ml bottle of Sobolo, I is the average income per month of his or her customers and Pos is the price his or her closest competitors charge per 500ml bottle of Sobolo and A is your colleague’s investment in marketing or advertisement campaign: a) Interpret the demand equation and explain what might have informed your choice of these factors as key determinants of Sobolo demand and why? b) Suppose that your colleague sold 350 bottles of Sobolo last week, where I = GHc 1,500, Pos = GHc 2.00 with no investment in advertisement, what is the price (Ps) that your colleague charged per bottle of Sobolo? Find and explain the price and income elasticities of demand for Sobolo. c) Your colleague is considering a GHc 1,100 promotional campaign to bolster sales and revenues and you have projected that the promotional campaign will change the demand equation to: ??=55−0.5??+0.2?+0.5???+4.25? Supposing that your projections are accurate, what number of bottles of Sobolo (Qs) will your colleague sell and why based on ?? , ? and ??? info in b? d) How will the concept of opportunity cost help you establish whether your colleague’s promotional campaign will be effective or not given no change in average income of his or her customers and no change in price of his or her closest competitors? What is advertisement elasticity of demand for Sobolo?

Expert Solution

Part (A)

Demand for 500ml bottles of Sobolo is negatively related to price charged for a 500ml bottle of Sobolo

Demand for 500ml bottle of Sobolo rises (falls) when price of 500ml bottle of Sobolo falls (rises)

Demand for 500ml bottles of Sobolo is positively related to average monthly income of people

Demand for 500ml bottle of Sobolo rises (falls) as monthly income rises (falls)

demand for 500ml bottle of Sobolo is positively related to price charged for 500ml bottle of Sobolo by other players in the market

demand rises (falls) as price charged by other players in the market rises (falls)

demand for 500ml bottle of Sobolo rises (falls) as advertising expenditure rises (falls)

Price of substitute goods and complementary goods for Sobolo could be included in demand function

Part (B)

Demand for sobolo is perfectly inelastic

10% rise in price leads to fall of 0.02857% in demand for Sobolo

demand for Sobolo is income elastic

10% rise in income leads to increase in demand by 8.57%

Part (C)

demand function for Sobolo changes to

Part (D)

10% rise in advertising expenditure leads to 9.294% rise in demand for Sobolo

advertising elasticity of demand is greater than income elasticity of demand.

Increase in advertising expenditure is better than increase in average monthly income of consumers to boost sales of 500ml bottles of Sobolo

Rahul Sunny answered 1 year ago

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