Supply and demand decisions for a firm
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Problem 1
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
1. Suppose the firm dropped the price to $2.50. Would this be beneficial? Explain. Illustrate your answer with the use of a demand schedule.
2. 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.
Problem 2
A bookstore opens across the street from the University Book Store (UBS). The new store carries the same textbooks but offers a price 30 % lower than UBS. If the cross-elasticity is estimated to be 1.5, and UBS does not respond to its competition, how much of its sales is it going to lose?
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Solution Summary
This solution discusses demand schedule, specifically in regards to determine how changes in price and expenditure would be beneficial or not to the company.
Solution Preview
If P =3 and A = 2,000, then putting these values in the equation we get:
Q = 1,000 - 3,000x3 + 10x2,000
=> Q = 1,000 - 9,000 + 20,000
=> Q = 12,000
Answer 1: If the firm drops is price to 2.50, then the quantity demanded will change.
Q = 1,000 - 3,000x2.5 + 10x 2,000
=>Q = 1,000 - 7,500 + 20,000
=> Q = ...
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