1.Suppose I estimate the following demand function for a tv:

Q = 400 - 3P +4T +.6A

Where:

Q = quantity demanded in units

P = price in dollars

T = tastes and preferences

A = Advertising expenditures in dollars

We are currently operating at the following values:

A = 10,000

T = 8000

P = 2800

In addition, suppose MC is 2800.

Given all this, please answer the following questions:

a.Derive the firm's current demand curve and calculate and interpret the firm's current price elasticity of demand.

Q = 400 - 3P + 4T + .6A

Substituting the values we get

Q = 400 - 3P + 4 * 8,000 + 0.6 * 10,000

Q = 400 - 3P + 32,000 + 6,000

Q = 38,400 - 3P

Price elasticity of demand = (Change in Quantity Demanded/Change in Price) * (Price/Quantity)

Where,

P = 2,800,

Q = 38,400 - (3 * 2,800)

Q = 30,000

Elasticity of demand = (dQ/dP) * (P/Q)

Elasticity of demand = - 3 * (2,800/30,000

Price Elasticity of demand = - 0.28

b.Given your answer in a, should the firm increase or decrease output in order to maximize profits?Explain and show your work on a well labeled graph.

c.What is the profit maximizing output and price?Show and explain all your work and match up your answer to your work in part b.

d.Calculate a "advertising elasticity of demand."Based on this, by what percent should advertising expenditures increase in order to increase sales by 10 percent?Note:work from the original price and output levels, NOT the profit maximizing levels.

2.List 3 products in order of their price elasticity of demand (start with the most elastic).Explain fully using the concepts developed in class why you ranked the goods in the order you did.Be sure to use all the price elasticity of demand determinants - not just one.