Suppose a firm has the following demand equation: Q = 1,000 - 3,000P + 10A, wher
ID: 1095490 • Letter: S
Question
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
A. suppose the firm dropped the price to $2.50. would this be beneficial? explain. Illustrate your answer with the use of a demand schedule.
B. Suppose the firm raised the price to $4.00 while increasing the advertising expenditures by $100. Would this be beneficial? Explain and Iillustrate your answer with the demand schedule.
Explanation / Answer
Following is demand schedule:
Q = 100 - 3,000 (3) +10 (2,000)
= 11,100
Q = 100 - 3,000 (2.5) +10 (2,000)
= 12,600
Q=100 - 3,000 (4) +10 (2,100)
= 9,100
a. When the price drops down to the $ 2.5 demand increases from 11,100 to 12,600. But total revenue decreases from 33,300 (11,100*3) to 31,500 (12,600*2.5). This is not beneficial.
b. When the price is increased to 4 and advertisemet to 2,100 (100 increase) demand drops down to the from 11,100 to 9,100. But Total Revenue inceases from 33,300 (11,100*3) to 36,400 (9,100*4). This is beneficial now.
P A Q=100 - 3,000(P)+10(A) 3 2,000Q = 100 - 3,000 (3) +10 (2,000)
= 11,100
2.5 2,000Q = 100 - 3,000 (2.5) +10 (2,000)
= 12,600
4 2,100Q=100 - 3,000 (4) +10 (2,100)
= 9,100
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