Question

Exercise 4.5

General Cereals is using a regression model to estimate the demand for Tweetie Sweeties, a whistle-shaped, sugar-coated breakfast cereal for children. The following (multiplicative exponential) demand function is being used:

QD=6,280 P(−1.35)A2.05N2.70QD=6,280 P−1.35A2.05N2.70

where

QDQD = quantity demanded, in 10-oz boxes

PP = price per box, in dollars

AA = advertising expenditures on daytime television, in dollars

NN = proportion of the population under 12 years old, in percent

What is the point price elasticity of demand for Tweetie Sweeties?

2.05

2.70

-0.66

-1.35

What is the advertising elasticity of demand?

2.05

0.76

-1.35

2.70

According to the estimated model, a percent increase in the proportion of the population under 12 years old the quantity demanded by percent.

Answer 1

Equation is

QD= 6,280 +P(−1.35) +A(2.05) +N(2.70)

Here 6280 is constant

and the values in brackets are elasticities associated with different variables.

Answer 1

Point price elasticity of demand is -1.35 .Keeping all other variables zero a 1% increase in price will cause 1.35% decrease in quantity demanded(opposite direction)

Answer 2

Advertising elasticity of Demand is 2.05

Answer 3

a 1% change in value of N will cause 2.7% change in demand in the same direction.