MK Corp estimates that its demand function is as follows: Q = 400 - 12:5P + 25A + 14Y+

10P* where Q is the quantity demanded per month, P is the product's price (in Rs.), A is

the firm's advertising expenditure (in Rs.'000 per month), Y is per capita disposable

income (in Rs'000), and P*

is the price of AJ Corp.

a. During the next five years, per capita disposable income is expected to increase by Rs.

5,000 and AJ is expected to increase its price by Rs 12. What effect will this have on the

firm's sales volume?

b. If MK wants to change its price by enough to offset the above effects, by how much

must it do so?

c. Compare the profitability of maintaining sales volume by either changing price or

changing advertising spending.

d. If MK's current price is $60 and it spends $10,000 per month on advertising, while per

capita income is $25,000 and AJ's price is $70, calculate the price elasticity of demand

with the price change.

e. What can be said about the effect of the above price change on profit? f. What can be

said about the relationship between the products of MK and AJ?