# Analyzing the given demand function

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

(1/Q)*dQ/dP=-0.68*(1/P)

dQ/dP=-0.68*(Q/P)

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.