A travel company has hired a management consulting company to analyze demand in

Question

A travel company has hired a management consulting company to analyze demand in 26 regional markets for one of its major products: a guided tour to a particular country. The equation for the quantity demanded is

Q = 1500 – 4p + 5A + 10I + 3Px
Where Q = amount of the product demanded
P = Price of the product in dollars
A = advertising expenditure in dollars
I = Income in dollars
Px = price of other travel products that are provided by a competing travel company.

a. Determine the demand curve for this product using the following data.
P = $400, A = $20,000, I = $15,000, Px = $500

b. Suppose people’s income drops to $10,000. How much would this firm have to increase its advertising in order to counteract the drop in income?

Explanation / Answer

a)

Q for the given data
= 1500 -4*400 + 5*20000 + 10*15000 +3*500
= 251400   (qty) (ANSWER)

b)

for I = $ 10000  and advt. = A ($),

Q = 251400 = 1500 -4*400 + 5*A + 10*10000 +3*500

=> A = 30000  ($)  (ANWER)

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