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)© BrainMass Inc. brainmass.com October 10, 2019, 3:06 am ad1c9bdddf
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 ...
The solution estimates the effect of changes in given parameters on the consumption of cereals.