Suppose that a coffee producing firm estimated the following regression of the demand for its brand of coffee:
Qc= 1.5-3 Pc+0.8Y+2Pb-0.6Ps+1.2A
Where Qc = sales of coffee brand C, in dollars per pound
Pc = price of coffee brand C, in dollars per pound
Y = personal disposable income, in millions of dollars per year
Pb = price of the competitive brand of coffee, in dollars per pound
Ps = price of sugar, in dollars per pound
A = advertising expenditures for coffee brand C, in hundreds of thousands of dollars per year.
Suppose also that this year, Pc = $2, Y = $2.5, Pb = $1.80, Ps = $1 and A =$1.
a) Interpret the results of the estimated demand.
b) Compute point price elasticity of demand for the firm’s brand of coffee with respect to its price.
c) Compute the cross-price elasticity of demand for coffee with respect to the price of competitive coffee brand b.
d) At the current price level, would it be viable for the firm to increase the price level of its brand of coffee? Support your answer. (Hint, what effect does an increase in price of the firm’s brand of coffee have on total revenue?)
e) Would you recommend that the firm continues to advertise its product?
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