# Economics – price elasticity questions

Q=  – 100P + 1.5Phd – 5Psd + 20A + 15Pop

P =  Price of pizza

Phd = Price of hot dogs (\$1.00, use 100 cents)

Psd = Price of soft drink (\$0.75, use 75 cents)

A =  Advertising 20 (\$20,000, use 20)

Pop = Percentage of population for pizza, 35%, using 35

1. Interpret all the coefficients in the above demand equation and then find the reduced demand equation, Q in terms of P only after plugging in the given values of non-price determinants above. What does the constant term in this reduced demand equation (Q in terms of P only) represent?

2. At a price of \$5, what is price elasticity of demand? Based upon the price elasticity you got at P = \$5.00, is it better to reduce price or raise price and why?

3. How far further down from the current price of \$5.00 could you reduce the price without hurting revenue? (i.e., MR would not be negative). Hint: consider my answer in ABC Sports. Find that price level and then express this price reduction in percentage using \$5.00 as base.

4. Compute the cross elasticity between hot dog/pizza as well as soft drink/pizza using Q you found in (b) and interpret the results.

5. If price is reduced further from \$5.00 by the percentage you got in (c), compute the impact of this further price reduction on soft drink and hot dog using the cross elasticity figures you got in (d) and interpret the results.

6. Is it a good idea to reduce price further based upon your answer (e)? Why or why not? Develop an argument if it is a good idea or not since there is no given answer using information you got so far in this question.

7. With the advertising budget of \$20,000 (use 20), calculate the elasticity of advertising using Q you obtained in (b)? Interpret the result. What would happen to constant term in a new reduced demand equation if there is an increase in advertising budget?

8. Due to the health consciousness on the part of the population concerned, there is 10% drop in the pizza population from 35% to 25% (use 35 v 25, not percentage). What would be its impact on the demand?

9. How much would the advertising expenditure have to be increased to compensate for the drop in population?

10. Do you think the above increase in the advertising expenditure is worthwhile or not? Use the price given in (b)

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