Management of a Columbus-based but nationally recognized ice cream producer completed a study of the demand for ice cream at their 47 locations nationwide. They calculated their multi-factor demand curve to have the following functional form:

= 600 1,800P + 0.75A + 2Y + 5Pop + 800^2.

Here, Q is the number of gallons of ice cream sold, P is the average price per gallon, A is the local advertising budget, Y is the income level in the area (scaled relative to Columbus), Pop is the population (in thousands), and PC is the average price of competitors' ice cream.

1. What is the quantity demanded in a city where the average price of the Columbus-based brand's ice cream is $3.50 and its competitors charge $1.25 on average? The city in question has a population of 692 and an income 1.2 times greater than Columbus. The company spends $5,000 a week advertising there.

2. The company has a policy that it spends $6000 per week on advertising in cities with more than 700,000 people. If the city's population increases by 10,000, what would be the new quantity of ice cream demanded there?

3. Is ice cream a normal good? How do you know?

4. Now, suppose the ice cream company's major rival started an intensive advertising campaign in this city.

a. Do you think demand for our company's ice cream is increasing or decreasing with respect

to the amount its competitor spends on advertising? Why?

b. How do you think the magnitude of this effect will compare to the effect of own-advertising on quantity demanded?

c. If our ice cream company knows its customers are intensely loyal to their brand, how would that change your answer for ii.?