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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 Summary

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

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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 provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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