The research department of the Corn Flakes Corporation (CFC) estimated the following regression for the demand of the cornflakes it sells:
QX = 1.0 - 2.0PX + 1.5I + 0.8PY - 3.0Pm + 1.0A
Qx = sales of the CFC cornflakes, in millions of 10-ounce box
PX = the price of CFC cornflakes, in dollars per 10-ounce box
I = personal disposable income in thousands of dollars
PY = the price of competitive brand of cornflakes, in dollars per 10 ounce box
Pm = price of milk in dollars per quart
A = advertising expenditures of CFC cornflakes, in hundreds of thousands of
dollars per year
This year PX = $2, I = $4, PY = $2.50, Pm = $1, and A = $2
a. Find sales of CFC cornflakes this year.
b. Calculate the elasticity of sales with respect to each variable in the demand function
c. Based on your answer to (b), what should CFC's pricing policy be if ut wants to increase sales revenue? Justify.
d. Estimate the level of sales next year if CFC reduces PX by 10 percent, increases advertising by 20 percent, I rises by 5 percent, PY is reduced by 10 percent, and Pm remains unchanged.