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The demand function for Newton's Donuts has been estimated as follows:
Qx = -14 - 54Px + 45Py + 0.62Ax
where Qx represents thousands of bagels; Px is the price per bagel; Py is the average price per bagel of other brands of bagels; and Ax represents thousands of dollars spent on advertising Newton's Donuts. Current values of independent variables are Px=0.95, Py=0.64 and Ax=120.
Show all of your calculations and processes. Describe your answer for each question in complete sentences, whenever it is necessary.
Calculate the price elasticity of demand for Newton's Donuts and describe its meaning. Explain your answer as well as show your calculations.
Derive an expression for the inverse demand curve for Newton's Donuts. Describe your answer and show your calculations.
If the cost of producing Newton's Donuts is constant at $0.15 per donut, should they reduce the price and thereafter, sell more donuts (assuming profit maximization is the company's goal)? Should Newton's Donuts spend more on advertising?
Verified Expert
The demand equation is relationship between the quantity demanded for the product and its price with quantity demanded is the dependent variable and the price is the independent variable and in inverse demand equation the price is the dependent variable and quantity demanded is the independent variable. The price elasticity of demand is ratio of change in quantity demanded divided by the change in the price. If absolute value of price elasticity of demand is greater than 1, the demand curve is said to be relatively elastic(%change in quantity will be more than % change in price).
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Thank you so much this helps to clarify my understanding. So many lectures and help guides vary and this makes it much more clear.
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