Management at the Johnston Corporation estimates a demand function for its lawnmower line to be:
Qk = 5-2.4*Pb+0.7*A+0.002*I+0.8*Pv
Where Qk = the quantity of lawnmowers, Pb = the own price of lawnmowers produced by Johnston ($/Unit)
A = the advertising expenditures for Johnson lawnmowers ($/ad unit in a year), I = income in Johnstonâ??s market ($/year), Pv = the price of lawnmowers produced by the Gibson corporation ($/Unit)
1. Explain the coefficients of each explanatory variable.
2. If Pb is $60, A is $200, I is $20,000 and Pv is 100, what is the quantity of Johnston Lawnmowers sold?
3. Determine the own price elasticity of demand for Johnston Lawnmowers.
4. Determine the income elasticity of demand.
5. Determine the cross price elasticity of demand. Interpret this measure.
6. Given the answers of (c) through (e), what is the most important factor in determining the demand for Lawnmowers?
7. If the Johnston Corporation wants to reduce its advertising expense to $190, and wants to offset the lost revenues by changing its price, should the price be increased or decreased?