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The research department of the Corn Flakes Corporation ( CFC) estimated the following regression for the demand of the cornfl akes it sells:

Q X = 1.0 - 2.0P X + 1.5I + 0.8P Y - 3.0P M + 1.0A

where Q X = sales of CFC cornfl akes, in millions of 10- ounce boxes per year
P X = the price of CFC cornfl akes, in dollars per 10- ounce box I = personal disposable income, in trillions of dollars per year P Y = price of competitive brand of cornfl akes, in dollars per 10- ounce box P M = price of milk, in dollars per quart A = advertising expenditures of CFC cornfl akes, in hundreds of thousands of dollars per year This year, P X = $ 2, I = $ 4, P Y = $ 2.50, P M = $ 1, and A = $ 2.

(a) find out the sales of CFC cornflakes this year.

(b) find out the elasticity of sales with respect to each variable in the demand function.

( c) Estimate the level of sales next year if CFC reduces P X by 10 percent and increases advertising by 20 percent, I rises by 5 percent, P Y is reduced by 10 percent, and P M remains unchanged.

(d) By how much should CFC change its advertising if it wants its sales to be 30 percent higher than this year?

Microeconomics, Economics

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