The demand function for Einstein Bagels has been estimated as follows:
Qx = -15.87 – 40.73Px + 84.17Py + 0.55Ax
Where Qx represents thousands of bagels; Px is the price per bagel; Py is the average price per bagel of other brands of bagels; and Ax represents thousands of dollars spent advertising Einstein Bagels.
a. Calculate the price elasticity of demand for Einstein’s Bagels and explain what it means.
b. Derive an expression for the (inverse) demand curve for Einsteins’s Bagels.
c. If the cost of producing Einstein’s Bagels is constant at $0.10 per bagel, should they reduce price and thereafter, sell more bagels (assume profit maximization is the company’s goal)?
d. Should Einstein Bagels spend more on advertising?