Question

Integrating problem:

The research department of the Corn Flakes Corporation (CFC) estimated the following regression for the demand of the cornflakes it sells:

​Qx= 1.0 - 2.0Px + 1.5I + 0.8Py - 3.0Pm + 1.0A

Where Qx = sales of CFC cornflakes, in millions of 10-ounce boxes per year.

​Px = the price of CFC cornflakes, in dollars per 10-ounce box.

​I = personal disposable income, in trillions of dollars per year.

Py = price of competitive brand of corn-flakes, in dollars per 10-ounce box.

Pm = price of milk, in dollars per quart

A = advertising expenditures of CFC cornflakes, in hundreds of thousands of dollars per year

​This year, Px = $2, I = $4. Py = $2.50, Pm = $1, and A = $2.

(a) Calculate the sales of CFC cornflakes this year

​(b) calculate the elascticity of sales with rspect to each variable in the demand function

(c) estimate the level of sales next year if CFC reduces Px by 10 percent, increases advertising by 20 percent, I rises by 5 percent, Py is reduced by 10 percent, and Pm remains unchanged.

​(d) by how much should CFC change its advertising if it wants its sales to be 30 percent higher than this year?

Answer 1