The monthly demand (Q) for video game consoles at the local Better Buy is described by the following multivariate linear demand function:
Q=2800-8P-4Pg+0.50Pc+16I+2A
where P is the prive of a video gameconsole (in dollars); Pg is the price of a video game (in dollars); Pc is the price of a cell phone (in dollars); I is average annual household income of the local population (in thousands of dollars); and A is monthly advertising expenditure (in hundreds of dollars)
You are given, in addition, the following information: the price of a video game is $40; the price of a cell phone is $120; average annual household income of the local population is $80,000; and Better Buy spends $1,000 per month on advertising.
A. Using the information given, graph the video game console demand curve. (Label the graph's axes appropriately and indicate the numeric values of intercepts)
B. If Better Buy charges a price of $300 for the video game console, how many video game consoles are demanded? What is the price elasticity of demand at this price? If Better Buy were to reduce the video game console price from $300, what will happen to total revenue as a result? Explain.
C. Give a precise interpretation of the income variable's impact coefficient (state your interpretation in terms of units of the relevant variables).
D. Assume Better Buy charges a price of $300 for the video game console, determine the cross-price elasticity of demand for video game consoles with respect to the price of cell phones. Interpret the vale that you obtain. Based on your work here, can you conclude that video game consoles and cell phones are substitutes? Why or why not?
E. Assume Better Buy charges a price of $300 for the video game console, determine the elasticity of demand for video game consoles with respect to advertising. Interpret the value you obtain for both.
F. Suppose average household income increases by $3,000. How will this affect the demand curvbe for video game consoles? Show graphically (be sure to label the new intercepts). Assume Better Buy charges a price of $300 for the video game console, how does the pricwe elasticity of demand now compare to the value you obtained in part B?