8. The Real Kool Toys Company manufactures and sells educational toys. An empirical demand function for one of the firm's products has been estimated over the last 21 quarters using regression analysis. The estimated demand function is:
QY = -8,000 - 5,000PY + 192A + 120I + 2,000PX
(6,000) (1,000) (120) (80) (800)
R2 = 91%
Here QY is quantity (measured in units) of Product Y demanded in the current period, A is hundreds of dollars of advertising ($00), I is thousands of dollars of disposable income per capita ($000), and PX is the price ($) of another toy manufactured by a competitor, ABC Toys. The terms in parentheses are the standard errors of the coefficients.
A. How would you characterize the ability of this empirical demand function to explain demand for product Y?
B. Currently, PY is $8, advertising is $25,000, disposable income per capita is $50,000 and PX is $7. What are expected sales of Y in this period?
C. What is the demand curve currently facing Real Kool for Product Y? (Note: Be careful to properly account for the units in which advertising and income appear in the estimated demand function.)
D. What is the point price elasticity of demand for Y at the current price?
E. Given the current price elasticity of demand, would a price reduction increase Real Kool profits? Explain.
F. What demand curve would Real Kool face for Product Y if it raised advertising expenditures to $37,500?