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A firm estimates its price elasticity of demand for poutine to be -2 and its elasticity of demand with respect to advertising to be 0.1. The firm currently charges $10 and sells 10,000 units. What will lead to a larger increase in revenue: a $2 drop in price (while keeping advertising constant) or doubling the amount of advertising (while keeping the price constant)?

A firm estimates its price elasticity of demand for poutine to be -2 and its elasticity of demand with respect to advertising to be 0.1. The firm currently charges $10 and sells 10,000 units. What will lead to a larger increase in revenue: a $2 drop in price (while keeping advertising constant) or doubling the amount of advertising (while keeping the price constant)?

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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**Price and Advertising Elasticity Scenario** A firm estimates its price elasticity of demand for poutine to be -2, while its elasticity of demand with respect to advertising is 0.1. Currently, the firm charges $10 and sells 10,000 units of poutine. The firm is considering two strategies to increase revenue. Which approach will lead to a larger increase in revenue? 1. **Price Reduction Strategy**: Implement a $2 drop in price while keeping advertising efforts constant. 2. **Advertising Increase Strategy**: Double the amount spent on advertising while maintaining the current price. This analysis examines the potential effects of these strategies using the given elasticities.
Transcribed Image Text:**Price and Advertising Elasticity Scenario** A firm estimates its price elasticity of demand for poutine to be -2, while its elasticity of demand with respect to advertising is 0.1. Currently, the firm charges $10 and sells 10,000 units of poutine. The firm is considering two strategies to increase revenue. Which approach will lead to a larger increase in revenue? 1. **Price Reduction Strategy**: Implement a $2 drop in price while keeping advertising efforts constant. 2. **Advertising Increase Strategy**: Double the amount spent on advertising while maintaining the current price. This analysis examines the potential effects of these strategies using the given elasticities.
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Step 1

Given 

Own price elasticity is -2

Advertising elasticity =0.1

 

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