Question

1. The research department of Corn Flakes Corporation (CFC) estimated the following regression for the demand of the cornflakes it sell:
   
   Q_x = 13.0 -6.5P_x + 2.5(I) + 2P_y -4P_m + 0.25A
   
   Where Q_x = sales of cornflakes, in millions of 10-ounce boxes per year
   P_x = the price of CFC cornflakes in dollars per 10-ounce box
   I   = personal disposable income of the country in trillions of dollars per year
   P_y = price of a competitive brand of cornflakes, in dollars per 10-ounce box
   P_m = price of milk in dollars per quart
   A   = advertising expenditures of CFC cornflakes in hundreds of thousands of dollars per year

                This year, P_x = $0.50, I =$5, P_y = $0.75, P_m =$1.25, A = $5.

1. Calculate the sales of CFC cornflakes for this year.
2. Calculate the elasticity of sales with respect to each of the variables in the demand function
3. Estimate the level of sales next year if CFC reduces Px by 2 percent and increases A by 20 percent, I rises by 5 percent, P_y is reduced by 2.5 percent, and P_m rises by 4 percent. (20 points)
   
   Reference Box 4 on pp. 147-148
   

• For part (c), remember that elasticity coefficients measure the percentage change in quantity divided by the percentage change in the other variable.

1. If price elasticity of demand = percentage change in quantity divided by percentage change in price, then percentage change in price times price elasticity is percentage change in quantity.
2. The percentage change times the quantity is the actual change in quantity.
3. Add changes caused by each of the terms to the pre-change quantity to find the post-change quantity.

Answer 1

Solution(s):