Tracy is a marketing manager at humbert and humbert literary works. She has esti
ID: 1198815 • Letter: T
Question
Tracy is a marketing manager at humbert and humbert literary works. She has estimated that the likely demand for a new novel is well represented by equations Qd=10,000- 400(p) +10,000 x D + A/10. Qd is the number of books sold. P is the price that humbert and humbert charges. D is the dummy variable taking a value of 1 if the author is famous and a value of 0 otherwise. A is the dollars spent marketing the book. Assume marginal cost is $10.
a) assuming no advertising, the own-price elasticity of demand at a price of $20 is __________ if the author is famous, and ________ if the author is unknown.
b) assuming that advertising is equal to $40,000, the own-price elasticity of demand at a price of $20 is __________ if the author is famous and __________ if the author is unknown.
Explanation / Answer
a)
assuming no advertising
Qd=10,000- 400(p) +10,000 (D)
dQd/dp = -400
if author is famous , D=1 , at P=20
Qd= 10000-400(20) +10000 = 12000
Ep= -(dQd/dp)*p/Qd = 400*(20/12000) =2/3 = 0.666
if author is unknown, D=0, at P+20
Qd =10000-400(20)= 2000
Ep= -(dQd/dp)*p/Qd = 400*(20/2000) =4
a) assuming no advertising, the own-price elasticity of demand at a price of $20 is 0.666 if the author is famous, and 4 if the author is unknown.
b) if advertisinf is $40000, Qd=10,000- 400(p) +10,000 D + 4000
dQd/dp = -400
when author is famous D=1,
Qd= 10000-400(20)+10000+4000 = 16000
Ep= -(dQd/dp)*p/Qd = 400*(20/16000) = 0.5
when author is unknown, D=0
Qd= 10000 -400(20)+4000= 6000
Ep=-(dQd/dp)*p/Qd = 400*(20/6000) = 1.33
b) assuming that advertising is equal to $40,000, the own-price elasticity of demand at a price of $20 is 0.5 if the author is famous and 1.33 if the author is unknown.
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