The current proposal on the table is to enter one of two markets, Market 1 or Market 2. The choice of which market to enter is yours to make. For the two new markets that have been proposed for possible entry, you know:

• Market 1: a population of 2,010,000 people, per-capita income of 20,000;
• Market 2: a population of 5,500,000 people, per-capita income of 16,000.

Market 1 is a smaller, higher income market than Market 2. Market research is available for Market 1 and shows that the average competitor price is 4.99 for that market. The best information available for Market 2 is that the average competitor price is expected to be 3.70, although there is some concern about the reliability of this estimate. The advertising budget is expected to be 15,000, but it is possible that it will be cut in half to 7,500 (25% chance) depending on other firm initiatives.

The entry decision must be made before the uncertainty about the advertising budget is resolved, but prices need not be set until after the advertising budget is fixed. The scale of entry is the same for either potential market, and so fixed costs are not an issue as they are basically the same for either market. Unit variable costs for producing and supplying units to retailers are steady over all quantity ranges and equal to 3.00 per unit. Operating profits (gross of fixed costs but including advertising costs) are given by (P - 3.00) times quantity sold minus advertising costs. Thus, as an example, if your firm spent 15,000 on advertising and sold 50,000 units at a price of 6.00, operating profit would be (6.00-3.00) times 50,000 minus 15,000, which equals 135,000.

Demand Specifications with Coefficients

Q_band=282031-81266P_band+3.664A+19970P_comp+0.052I+0.031Pop1918.019T+29493.745u

Ignoring uncertainty regarding the coefficient estimates, assume your demand exactly equals the demand specified by your coefficient estimates.

1. Assuming only a single price can be set, state what price should be charged in each of the markets and how price should vary with the advertising budget. State what level of profit you expect from each of the two markets. Please note under this demand specification, using the single-pricing markup rule can be difficult since the demand elasticity changes as we move along the demand curve. As such, you will likely be better off performing a "brute-force" analysis. In other words, calculating the profits at a variety of relevant advertising/price/etc. levels. Show work.