Determine elasticities for every single variable

Assignment Help Macroeconomics

Reference no: EM13175387

Amazing Foods Frozen Yogurt shops have enjoyed rapid growth in northeastern states in recent years. From the analysis of Amazing's various outlets, it was found that the demand curve follows this pattern:

Q = 200 - 300P + 120Y + 65T - 250AC + 400AJ

Where: Q = number of cups served per week

P = average price paid per cup

Y = per capita income in the given market (in thousand $)

T = average outdoor temperature

AC= Competition's monthly advertising expenditures (in thousand $)

AJ= Amazing's own monthly advertising expenditures (in thousand $)

One of the outlets has the following conditions:

P = $1.50; Y= $10,000; T = 60; AC= $15,000; AJ = $10,000

a. Estimate the number of cups served per week by this outlet. Also determine the equation for the outlet's demand curve. Hint: Be very careful of units! If something is measured in millions, then $10,000,000 = 10 units in the equation, for example.

200-300(1.50) + 120(10) + 65(60)-250(15) + 400(10)

= 200-450+1200+3900-3750+4000

Q =5100

200-300P + 120(10) + 65(60)-250(15) + 400(10)

=200-300P+1200+3900-3750+4000

Q=5550-300P

b. What would be the effect of a $5,000 increase in the competitor's advertising expenditure? Determine the new demand curve and explain what has occurred.

200-300(1.50) + 120(10) + 65(60)-250(15) + 400(15)

= 200-450+1200+3900-3750+6000

Q=7100

200-300P + 120(10) + 65(60)-250(15) + 400(15)

=200-300P +1200+3900-3750+6000

Q= 7550-300P

The effect of a $5000 increase in advertising is to shift the demand curve upward following a 2000 unit increase in the intercept.

c. What would Amazing's advertising expenditure have to be to counteract this effect? Show all calculations and explain briefly.

5100=200-300(1.50) + 120(10) + 65(60)-250(15) + 400Aj

5100= 200-450+1200+3900-3750+400Aj

4000=400Aj

Aj=10

So Amazing's expenditure should increase $10,000

d. Determine elasticities for every single variable in the equation (ignore the constant). Interpret your answers (say what the elasticity means).

Reference no: EM13175387

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