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    Analyzing the given demand function

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    lnQ=9.01-0.68lnP+0.75 lnA-1.3 lnM,

    Where is the quantity of cereal ,P is the price of Cereal , A is the level of advertising and M is the income . Based on this information, determine the effect on the consumption of cereal :

    i) 5 percent reduction in price of cereal (P)

    ii) 4 percent increase in income (M)

    iii) 20 percent reduction in cereal advertising (A)

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    Solution Preview

    i) a 5 percent reduction in price of cereal (P)
    lnQ=9.01-0.68lnP+0.75 InA-1.3 lnM
    Differentiating both sides with respect to P, we get

    Own price elasticity of demand=(dQ/dP)*(P/Q)= -0.68*(Q/P)*(P/Q)=-0.68

    Change in price of cereal=-5%
    Change in demand of cereal=change in price of cereal*own price ...

    Solution Summary

    The solution estimates the effect of changes in given parameters on the consumption of cereals.