How useful are elasticity estimates, and how easy are they to make? Clearly price, output and advertising decisions each require some assessment of the impact of relevant variables upon demand, which is precisely what we mean by elasticity. The numerical parts of the question are the straightforward matter of substituting numbers into the demand equation, and using the resulting answers. Note that revenue is maximised either when marginal revenue equals zero, or when price elasticity equals minus one.

6. The relationship between advertising and profitability is a complex matter of sorting out causation. It is equally possible that increasing profitability leads to increased advertising. Basically a good answer would look at why advertising may increase profits (by shifting the demand curve), and note that advertising may be carried on beyond this point (so that the marginal cost of the last advert exceeds marginal revenue). Note also that other objectives may be important, for e.g. the sales maxiiniser advertises more than the profit maximiser. Finally the empirical evidence is less than clear, but should be outlined.

7. This question relates to Alchian's definition of the dimensions of output and the impact of each upon costs. A greater contemplated volume of output may be associated with different technologies, methods of production, etc., although not without limit. A full discussion of economies of scale is only tangentially relevant to this question.

8. These market-entry situations differ in the amount of production and market knowledge available, and the likely extent of economies of scale, differing elasticities, etc. Basically the market situation is such that a skimming price policy is likely in the competition motorcycle market, whilst a penetration price policy is more likely in the volume small car market.

9. This is a simple 'newboy problem', and is readily answered using the techniques of Chapter 4. Note that the expected cost of overhaul is 200. Part (c) is concer