Qt=200-0.01Pt+0.005Pm-10Pg+0.01I+0.003A
Qt= quantity purchased
Pt= the average price of Toyotas Pm=the average price of mazdas
Pg=the price of gasoline I=per capita income A=dollars spent annually on advertising
1. Marketing suggests lowering PT from $20000 to $15000. The size of the elasticity coefficient in #1 should tell you what is likely to happen to revenue. Explain why this is (or is not) a good marketing suggestion from a revenue viewpoint (note: your answer in #1 and the calculations in #2 should be giving the same message). If the implications in #1 and #2 differ, does the difference make sense (or did you make a mistake in #1 or #2)?
2. Assume the PT = $17500 (which should make QT = 295). Now, using the point elasticity formula below, calculate the point price elasticity of demand. Is this point elasticity coefficient the same as the arc coefficient in #1? Why does this make sense if the two are the same? If the two differ, does this make sense and why? The formula is:
3. Calculate the point gasoline cross-price elasticity of demand with PG = $1.00. Use QT corresponding to PT = $20000. Other variables and their values are given at the top, before question #1. Does this elasticity indicate that the demand for Toyotas is relatively responsive to changes in the price of gasoline (PG)? Explain why or why not. The formula is:
4. Competition might be a worry for Toyota. Mazdas are represented by PM . Calculate the point Masda cross-price elasticity of demand with PM = $20000 and PT = $20000. Does this elasticity coefficient indicate that the demand for Toyotas is relatively responsive to changes in the price of Mazdas? Explain why or why not. The formula is: