Managerial Economics 6th Edition Ch 5. Problem #2 Since all the Hawkins Company\

Question

Managerial Economics 6th Edition Ch 5. Problem #2

Since all the Hawkins Company's Cost (other thanadvertisin) are essentially fixed cost, it wants to maximize its total revene (net of advertising expenses). According to a regression analysis (based on 124 obsercations carried out by a consultant hired by the Hawkins Company,

Q= -23 -4.1P + 4.2I + 3.1A

where Q is the quantity demanded of the firm's prodcut (in dozens), P is the price of the firm's product (in dollars per dozen), I is per capita income (in dollars), and A is advertising expenditure (in dollars).

a. If the price of the product is $10 per dozen, should the firm increase its advertising?

b. If the advertising budget is fixed at $10,000 and per capita incomeequals $8,000 what is thefirm's marginal revenue curve?

c. If the advertising budget is fixed at $10,000 and per capita income equals $8,000 what price should the Hawkings Company charge?

Explanation / Answer

Given Q= -23-4.1P+4.2I+3.1A

TR= P*Q = -23P - 4.1 P^2 + 4.2 IP+3.1AP

Total revenue less advertising expenditure = TR-A = -23P-4.1P^2+4.2IP+(3.1P-1)A

=-640+42I+30A . Now if P=10

d(TR-A)/dA = 30 which is greater than zero. Hence Advertising expense increases with increase in net revenues.

b. P= (-23-Q+33600+31000)/4.1 = 15750-0.244Q

TR= 15750Q-0.244Q

MR= 15750-0.488Q

c. equating MR=0, we get P= 7875

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