Question

Since all the Hawkins Company’s costs (other than advertising) are essentially fixed costs, managers want to maximize total revenue (net of advertising expenses). According to a regression analysis (based on 124 observations) carried out by managers,

Q = -23 - 4.1P + 4.2I + 3.1A

where Q is the quantity demanded of the firm’s product (in dozens), P is the price of the firm’s product (in dollars per dozen), I is per capita income (in dollars), and A is advertising expenditure (in dollars).

a. If I = 5,000 and A = 10, what is the Hawkins Company’s demand curve?

b. If P = 10 (and the conditions in part a hold), estimate the quantity demanded of Hawkins Company’s product.

c. Calculate the price elasticity of demand, Income elasticity of demand, and Advertising elasticity of demand for the firm’s product and interpret their results.

d. Calculate the Advertising elasticity of demand for the firm’s product. Should managers increase advertising? Why or why not?

Answer 1