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(A) An agribusiness firm marketing a cereal product Good Morning hires an economist to determine the demand for its product. After months of hard work,
(A)An agribusiness firm marketing a cereal product "Good Morning" hires an economist to determine the demand for its product. After months of hard work, the economist informed the company that the demand for Good Morning (Qx) is given by the following equation:
Qx = 12,000 -5,000Px + 5Y + 500Pc
where Px is the price of Good Morning cereal; Y is per capita income, and Pc is the average price of competing products. The average values of Px, Y, and Pc are $5, $10,000, and $6, respectively.
Using the above information:
- Estimate own-price elasticity, cross-price elasticity, and income elasticity of Good Morning cereal.
- Determine what effect a price increase of Good Morning would have on total revenue. Please state whether increase, decrease, no changes in total revenue and why?
- If the government decided to increase the sales tax of the cereal products, based on the estimated elasticity, who bears more the tax (tax incidence) between the producer and consumers?
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