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 consultant uses data to estimate the following equation: Q = 1,500 - 4P + 5A +10I + 3PX where Q is the amount demanded per period; P is the price of the product in dollars; A is advertising expenditures in thousands of dollars; I is per capita income in thousands of dollars; and PX is the price of some other travel products offered by a competing travel company. a. Calculate the amount demanded for the product using the following data: P = $400; A = $20,000; I = $15,000; and PX = $500. b. Suppose the competitor reduced the price of its travel product to $400 to match the price of this firm's product. How much would this firm have to increase its advertising in order to counteract the drop in its competitor's price?.

Explanation / Answer

Q = 1,500 - 4P + 5A +10I + 3PX

a) If , P = $400; A = $20,000; I = $15,000; and PX = $500.

Then Q= 1500 - 4( 400 ) + 5 ( 20000) + 10 ( 15000) + 3 ( 500 )

= 251400

b ) If PX = 400 , and the Q must remain same

=> Q= 1500 - 4( 400 ) + 5 ( A ) + 10 ( 15000) + 3 (400 ) , { as I and P remain the same }

=> 251400 = 151100 - 5A

=> 5A = 100300

=> A = 20060

The increase in advertising expenditures = 20060 - 20000 = $ 60

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