Task 1.

A firm that supplies fur coats has estimated that the price elasticity of demand for its coats is -2.5. The firm has determined that an additional $100,000 in advertising would generate $200,000 in additional revenues. What would you advise the firm to do with this initiative? Explain your decision. Provide the necessary formulas and short theory definitions.

Task 2.

Consider a firm manufacturing single product which is exclusive and not produced by rival companies. The market demand for a product is 6,000/(p + 3)2, where p is its price. The company employs technology that ensures constant marginal costs equal to $6 per unit at current prices for variable inputs. What price will the company charge to maximize its profits?

Provide an explanation for the given answer.