Question
Suppose a competitor lowers the price of a good by 10% and that the price elasticity of demand = -4, the cross price elasticity =
Suppose a competitor lowers the price of a good by 10% and that the price elasticity of demand = -4, the cross price elasticity = +2, the advertising elasticity= +5 and income elasticity is = +1.
(a)Assuming you are holding advertising and incomeconstant, by what percent must you lower
price in order to keep sales constant? Please show your calculations.
(b)Now, assuming your price stays constant (you don't lower it as in "a" above), by what percent
must the firm increase advertising spending in order to keep sales constant?Please show your calculations.
You must calculate percent change and not the numerical amount of the change.
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