Suppose a firm has the following demand equation:
Q = 1,000 - 3,000P + 10A,
where Q = quantity demanded
P = product price (in dollars)
A = advertising expenditures (in dollars)
Assume for the questions below that P = $3 and A = $2,000
a. Suppose the firm dropped the price to $2.50. Would this be beneficial? Explain. Illustrate your answer with the use of a demand schedule.
b. Suppose the firm raised the price to $4.00 while increasing the advertising expenditures by $100. Would this be beneficial? Explain. Illustrate your answer with the demand schedule.
The solution examines the effect of increasing price (in conjunction with increasing advertising expenditure) and decreasing price on demand, given the demand equation.