Question: Pop-O Popcorn, Inc. sells bags of flavored gourmet popcorn in a popular mall. As shop owner and operator, Cara estimates the demand for flavored popcorn to be: Q 1,500- 50P +4A, where A denotes advertising weekly spending (in dollars), Q is the bags of popcorn demanded and P is the price of a bag of popcorn. She is currently charging $2.50 per bag of popcorn (for which the marginal cost is $1.25) and spending $600 per week on advertising.
(a) Compute the own-price elasticity of demand. What does it imply?
(b) Compute the advertising elasticity
(c) Examine if the store should consider increasing its spending on advertising.
(d) Check whether the current $2.50 price is profit maximizing. If not, should the store raise or lower its price? Why? (Assume A $600)