As the manager of a restaurant, you decided to estimate the demand equation

| November 24, 2016

1. As the manager of a restaurant, you decided to estimate the demand equation for your specialty food. After careful statistical analysis,your estimation resulted in the following demand equation. All parameters are statistically significant at the 5% significance level. Show all work(3 pts each)

QD = 1000 – 400P + 1.5PY + 2M + 1.1A


P = price of food

PY = price of related food Y

M = average income of customers per year

A = number of ads per year.

Suppose at the present P = $50, PY = $60, M = $30,000, and A = 500 units.

a. What is the price elasticity of demand of your specialty food?
b. What is the cross-price elasticity of demand of your food with respect to the price of the related product Y?
c. What is the income elasticity of demand ofyour food?

d. A recent report in The Wall Street Journal says that national income is expected to rise by 3 percent this year. What do you expect will happen to your sales?

e. If your business wants to increase its sales by 10% through a price-change, what should it do to price – increase? decrease? By what percentage amount?

f. If the company wants to increase its sales by5% by changing its ad policy, what should it do? increase? decrease?it’s ad units. By what percentage amount?

g. Suppose the newly elected major decides to raise the sales tax on your product, causing the price to rise by 10%. Will sales of the product rise or fall, and by what percentage amount?

h. Is your business maximizing its sales revenue by charging $50? If not, how much should it charge in order to maximize its sales revenue?

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