2. The demand function for Einstein Bagels has been estimated as follows: Qx = -

Question

2. The demand function for Einstein Bagels has been estimated as follows:

Qx = -15.87 %u2013 40.73Px + 84.17Py + 0.55Ax
where Qx represents thousands of bagels; Px is the price per bagel; Py is the average price per bagel of other brands of bagels; and Ax represents thousands of dollars spent advertising Einstein Bagels. The current values of the independent variables are Ax=216, Px=0.85, and Py=0.79.

a.       Calculate the price elasticity of demand for Einstein%u2019s Bagels and explain what it means.

b.      Derive an expression for the (inverse) demand curve for Einsteins%u2019s Bagels.

c.       If the cost of producing Einstein%u2019s Bagels is constant at $0.10 per bagel, should they reduce price and thereafter, sell more bagels (assume profit maximization is the company%u2019s goal)?

d.      Should Einstein Bagels spend more on advertising?

Explanation / Answer

A) delta Q *p /delta P*q = 40.73 * 0.85 =34.6205

b) PX = ( QX -0.55AX +15.87 ) / 40.73

C)cross price elasticity = 40.73 * 0.79 =32.1767 (not clear what to do )

d)yes as elasticity is very less compared to price 0.55 <<< 40.73<84.17   

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