Economics - Managerial Economics

1. Suppose a firm has the following demand equation, Q = 1,000 - 3,000P + 10A, where Q = quantity demanded, P = product price (in dollars), and A = advertising expenditures (in dollars)

Assume for the questions below that the current P = $3 and A = $2,000

a. Suppose the firm dropped the price to $2.50. Would this be beneficial? Explain.

b. Suppose the firm raised the price to $4.00 while increasing the advertising expenditures by $100. Would this be beneficial? Explain.

You have to show how the change in price will affect the total revenue of the company.

Begin by plugging the numbers for the current price and advertising expenditures in the demand equation to find the quantity.

For example, at P = 3, Q = 1,000 - 3,000(3.00) + 10 (2,000) = 12,000 Then, calculate the total revenue. TR = Q x P = 12,000 x $3.00 = $36,000

Use the same procedure to find the total revenue at a price of $2.50 and compare it with the initial total revenue of $36,000.

Obviously, if the total revenue falls at this price, lowering the price is not advantageous. Then, find the total revenue at a price of $4 and advertising expenditures of $2,100.

Another way to solve the problem is to calculate the price elasticity of demand within the price ranges of $3 - $2.50 and $3 - $4. Then, you have to review the relationship between price elasticity of demand and total revenue.

2. The demand and supply functions are given below.

QD = 500 - 2P

QS = -100 + 3P

Graph the supply and demand curves using Excel
Find the equilibrium price and quantity

If the current price of the product is $100, what is the quantity supplied and quantity demanded? How would you describe this situation? What would you expect to happen in this market (will the price go up or down)?

If the current price of the product is $150, what is the quantity supplied and quantity demanded? How would you describe this situation? What would you expect to happen in this market (will the price go up or down)?

Suppose that the demand changes to QD = 600-2P and the supply function stays the same. Graph the new situation in Excel. Find the new equilibrium price and quantity, and show it on your graph.