Analysts at the Fleetfeet Corporation estimate a demand function for its athletic shoe line to be:
Qf = 5 - 2.4*Pf + 0.7*A + 0.002*I + 0.8*Ps
Where Qf = the quantity of shoes sold, Pf = the own price of shoes produced by Fleetfeet ($/pair)
A = the advertising expenditures for Fleetfeet shoes ($/ad unit in a year), I = income in Fleetfeet's market ($/year), Ps = the price of shoes produced by the Swiftshoes corporation ($/pair)
(a) Interpret the coefficients of each explanatory variable.
(b) If Pf is $60, A is $200, I is $20,000 and Ps is 100, what is the quantity of Fleetfeet shoes sold?
(c) Calculate the own price elasticity of demand for Fleetfeet shoes. Interpret this measure.
(d) Calculate the income elasticity of demand. Interpret this measure.
(e) Calculate the cross price elasticity of demand. Interpret this measure.
(f) Given the answers of (c) through (e), what is the most important factor in determining the demand for shoes?
(g) If the Fleetfeet corporation seeks to reduce its advertising expenditures to $190, and seeks to offset the lost revenues in part by changing its price, should the price be increased or decreased? Explain.