Question: 1) Demand Function: Q it (A it ) = i + Ait + e it Profit Function: (A) = 6Q(A) 5.5Q(A) A 2 Using this

1) Demand Function: Qit(Ait) = i + Ait + eit

Profit Function: (A) = 6Q(A) 5.5Q(A) A2

Using this profit function, solve for the profit maximizing advertising level as a function of i , , and eit.

2) Suppose you estimate the relationship between quantity and advertising using a regression and you find the relationship:

(a) Q = 2.811 + 19.469A

Your p-value on the coefficient of A is p<0.0001 and the 95% confidence interval is [18.876, 20.063]

what would the implied optimal level of advertising?

(b) Q = 99.92 + 0.135A

Your p-value on the coefficient of A is p=0.081 and the 95% confidence interval is [-0.017, 0.286]

what would the implied optimal level of advertising?

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