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Calculating price and advertising elasticity values

General Cereals is using a regression model to estimate the demand for Tweetie Sweeties, a whistle-shaped, sugar-coated breakfast cereal for children. The following (multiplicative exponential) demand function is being used:

QD = 6,280P-2.15A1.05N3.70
where
QP=quantity demanded in 10 oz. boxes
P =price per box in dollars
A =advertising expenditures on daytime television, in dollars
N =proportion of the population under 12 years old

a. Determine the point price elasticity of demand for Tweetie Sweeties.
b. Determine the advertising elasticity of demand.
c. What interpretation would you give to the exponent of N?

Solution Preview

a. Determine the point price elasticity of demand for Tweetie Sweeties.

QD= 6,280*P^(-2.15)*A^1.05*N^3.70

Differentiate with respect to P, we get
dQD/dP=-2.25*6280*P^(-2.15-1)*A^1.05*N^3.70
=-2.25*6280*P^(-2.15) ...

Solution Summary

Solution depicts the steps to calculate the price elasticity and advertising elasticity of demand in the given case.

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