QD = - 100P + 1.5Phd - 5Psd + 20A + 15Pop
P = Price of pizza
Phd = Price of hot dogs ($1.00,...

Question

QD =  - 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
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.
	
Document Preview: QD =  - 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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?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?  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.Compute the cross elasticity between hot dog/pizza as well as soft drink/pizza using Q you found in (b) and interpret the results.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.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.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?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...

Robert · Accepted Answer

QD =  - 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
a. 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? 
Answer: 
[Note; Unit value of Q is not given. So I have interpreted it in unit form] 
The coefficient of P is -100. This means, if price of pizza increases by one cent, quantity 
demanded of pizza on average will fall by 100 units. 
The coefficient of Phd is 1.5. This means if price of hot dogs increases by one cent, the quantity 
demanded of pizza on average will increase by 1.5 units. 
The coefficient of Psd is -5. This means if price of soft drink rises by one cent, quantity 
demanded of pizza on average will fall by 5 units. 
The coefficient of A is 20. This means if advertisement expenditure rises by $1000, the quantity 
demanded of pizza on average will rise by 20 units. 
The coefficient of Pop is 15. This means if percentage of population for pizza rises by one 
percent, the quantity demanded of pizza on average would increase by 15 units.
Substituting Phd = 100, Psd = 75, A = 20, Pop = 35 in the demand function: QD =  - 100P + 
1.5Phd - 5Psd + 20A + 15Pop
We get reduced demand function as: 
QD =  - 100P + 1.5*100 - 5*75 + 20*20 + 15*35 = 700 – 100P or 
Qd = 700 – 100P  ………. Reduced demand 
The constant is 700. This shows the maximum aggregate demand of pizza when its price is zero. 
b. 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?   
Answer: 
From reduced demand function, dQ/dp = -100 
At price (P)  = $5, quantity demanded (Q) = 700-100*5 = 200 
Price elasticity of demand = (dQ/dp)*(p/Q) = -100*(5/200) = -2.5 
In absolute term, price elasticity of demand = 2.5. Since this value is greater than 1,

QD = - 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 =...

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