Question

I need help answering these last two parts of the question. The demand function for Newton’s Donuts has been estimated as follows: Qx = -14 – 54Px + 45Py + 0.62Ax where Qx represents thousands of donuts; Px is the price per donut; Py is the average price per donut of other brands of donuts; and Ax represents thousands of dollars spent on advertising Newton’s Donuts. The current values of the independent variables are Ax=120, Px=0.95, and Py=0.64.c.

1. Calculate the price elasticity of demand for Newton’s Donuts and describe what it means. Describe your answer and show your calculations.  

   Qx = -14 – 54Px + 45Py + 0.62Ax

   Px1 = 0.95           

   Q1 = -14-54x0.95+45x0.64+0.62x120 = 37.9

   Elasticity of demand = (0.95/37.9x54) = -1.35

2. Derive an expression for the inverse demand curve for Newton’s Donuts. Describe your answer and show your calculations.  

   Qx = -14 – 54Px + 45Py + 0.62Ax

   Inverse demand curve: Px = 1/54(-Qx-14+45Py+0.62Ax)

   Px = 1/54(-37.9-14+45x0.64+0.62x120) or 1/54(-37.9+89.2) = 0.95

   Py = 0.64 and Ax = 120 (assuming they are constant) Px = 0.95

3. If the cost of producing Newton’s Donuts is constant at $0.15 per donut, should they reduce the price and thereafter, sell more donuts (assuming profit maximization is the company’s goal)?
4. d. Should Newton’s Donuts spend more on advertising?

Answer 1

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