Case Study for Unit 6 (Demand Forecasting)

The research department of the Corn Flakes Corporation (CFC) estimated the following regression for the demand of the cornflakes it sells:

Q_X = 1.0 - 2.0P_X + 1.5I + 1.8 P_Y - 3.0P_M + 1.0A

WhereQx= sales of CFC cornflakes, in million of 10 - ounce boxes per year

P_X = the price of CFC cornflakes, in dollars per 10 - ounce box

I = personal disposable income, in trillions of dollars per year

P_Y = price of competitive brand of cornflakes, in dollars per 10 - ounce box

P_M = price of milk, in dollars per quart

A = advertising expenditures of CFC cornflakes, in hundreds of thousands of dollars per year

This year, P_X = $2, I = $4, P_Y = $2.50, P_M = $1, and A = $2.(a) Calculate the sales of CFC cornflakes this year.(b) Calculate the elasticity of sales with respect to each variable in the demand function.(c) Estimate the level of sales next year if CFC reduces PX by 10 percent and increases advertising by 20 percent, I rises by 5 percent, PY is reduced by 10 percent, and PM remains unchanged.(d) By how much should CFC change is advertising if it wants its sales to be 30 percent higher than this year?

Source: Dominick Salvatore (2012) Managerial Economics Principles and Worldwide Application . 7^th ed.New York: Oxford University Press, page 119 -120