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Supply and demand decisions for a firm

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?

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 = ...

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.

$2.19