04 Jun Question The following is a full-blown demand equation
Question
The following is a full-blown demand equation for Pizza. This problem is loosely based on problem #6 of Joy’s Frozen Yogurt of chapter 3 on D and S.
QD = – 200P + 1.5Phd – 5Psd + 20A + 15Pop
P = Price of pizza
Phd = Price of hot dogs ($2.00, use 200 cents)
Psd = Price of soft drink ($1.50, use 150 cents)
A = Advertising 40 ($40,000, use 40)
Pop = Percentage of population for pizza, 70%, using 70
a. Interpret all the coefficients in the above demand equation and then find the reduced demand equation, Q in terms of P only assuming the above values of non-price determinants. What does the constant term in this reduced demand equation (Q in terms of P only) represent?
b. At a price of $5, what is price elasticity? Based upon the price elasticity you got at P = $5.00, is it better to reduce price or raise price and why or why not?
c. How far further down from the current price of $5.00 could you reduce the price without hurting revenue? (i.e., MR should not be negative). Find that price level and then express this price reduction in percentage using $5.00 as base. (Refer to my answer file for ABC sports for this problem)
d. Compute the cross elasticity between hot dog/pizza as well as soft drink/pizza using Q you found in (b) and interpret the results. Please read my elasticity comments on my answer file for homework problems of chapter 3.
e. If price is reduced further from $5.00 by the percentage you got in (c), compute the impact of this further price reduction on soft drink and hot dog using the cross elasticity figures you got in (d) and interpret the results. You may consider soft drink may include alcoholic drink such as beer/wine.
f. Is it a good idea to reduce price further based upon your answer (e)? Why or why not?
g. With the advertising budget of $40,000 (use 40), calculate the elasticity of advertising using Q you obtained in (b)? Interpret the result. What would happen to a constant term in a new reduced demand equation as a result an increase in advertising budget?
h. Due to the health consciousness on the part of the population concerned, there is 10% drop (use 10) in the pizza population from 70%. What would be its impact on the demand?
i. How much would the advertising expenditure have to be increased to compensate for the drop in population?
j. Do you think the above increase in the advertising expenditure is worthwhile or not? Provide number for your argument.
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