Problem 1: Suppose a firm has the following demand equation:
Q = 1,000 - 3,000P + 10A,
where Q = quantity demanded
P = product price (in dollars)
A = advertising expenditures (in dollars)
Assume for the questions below that P = $3 and A = $2,000
I) Suppose the firm dropped the price to $2.50. Would this be beneficial? Explain. Illustrate your answer with the use of a demand schedule.
II) Suppose the firm raised the price to $4.00 while increasing the advertising expenditures by $100. Would this be beneficial? Explain. Illustrate your answer with the demand schedule.
Problem 2: A bookstore opens across the street from the University Book Store (UBS). The new store carries the same textbooks but offers a price 30 % lower than UBS. If the cross-elasticity is estimated to be 1.5, and UBS does not respond to its competition, how much of its sales is it going to lose?