solution

The Schmidt Corporation estimates that its demand function is

Q = 400 – 3P + 4I + 0.6A where Q is the quantity demanded per month, P is the product’s price (in dollars), I is per capita disposable income (in thousands of dollars), and A is the

firm’s advertising expenditures (in thousands of dollars per month). Population

is assumed to be constant. a. During the next decade, per capita disposable income is expected to

increase by $5,000. What effect will this have on the firm’s sales?

b. If Schmidt wants to raise its price enough to offset the effect of the

increase in per capita disposable income, by how much must it raise its

price? c. If Schmidt raises its price by this amount, will it increase or decrease the

price elasticity of demand? Explain. Make sure your answers reflect the

fact that elasticity is a negative number.