Question

6.   Joy’s Frozen Yogurt shops have enjoyed rapid growth in northeastern states in recent years. From the analysis of Joy’s various outlets, it was found that the demand curve follows this pattern:
Q=200-300P+120I+65T-250Ac +400Aj

where Q = number of cups served per week P = average price paid for each cup
I = per capita income in the given market (thousands) T = average outdoor temperature
Ac = competition’s monthly advertising expenditures (thousands) Aj = Joy’s own monthly advertising expenditures (thousands)
One of the outlets has the following conditions: P = 1.50, I = 10, T = 60, Ac = 15, Aj = 10. a.   Estimate the number of cups served per week by this outlet. Also determine the outlet’s
demand curve. b. What would be the effect of a $5,000 increase in the competitor’s advertising expendi-
ture? Illustrate the effect on the outlet’s demand curve. c.   What would Joy’s advertising expenditure have to be to counteract this effect?

Answer 1

a) Q = 200 - 300(1.5) + 120(10,000) + 65 x 60 - 250(15000) + 400(10000)

Q = 200 - 450 + 1200,000 + 3900 - 3750,000 + 4000,000 = 1453650

b) Q = 200 - 300(1.5) + 120(10,000) + 65 x 60 - 250(20000) + 400(10000)

Q = 200 - 450 + 1200,000 + 3900 - 5000,000 + 4000,000 = 203650

c) Q = 200 - 300(1.5) + 120(10,000) + 65 x 60 - 250(20000) + 400(10000 + X)

1453650 = 203650 + 400X

400X = 1453650 - 203650

400X = 1250,000

X = 3125

So, Joy's advertising expenditure have to be increased by 3125 to counteract the effect.