Florid Technologies is a manufacturer of exercise machines. Their best-selling device, a mechanical swimming simulator, has been on the market for several years. The demand function for the simulator was estimated in log-linear form using time-series data. The results are presented below.
QX = 110PX-0.20 PY0.30 PZ-0.10 A0.10 I0.01
The number of simulators sold per week (QX) was found to depend on the price charged for a simulator (PX), the average monthly cost of membership at a health club (PY), the cost of an accessory package designed for use with the simulator (PZ), monthly advertising expenditures (A) in thousands, and average annual household income (i)in thousands.
(i) If , and , how many simulators can Florid Technologies expect to sell in a week? (ii)Interpret the price elasticity, cross-price elasticities, advertising elasticity, and income elasticity of demand for simulators.
(iii)The president of Florid Technologies plans to increase the simulator's price by 10 percent and to increase advertising expenditures by 5 percent. By what percentage can sales of simulators be expected to change? Will total revenue increase, decrease, or remain the same? Explain your answer.
(iv)
If the price of a simulator is increased by 10 percent and the cost of an accessory package is reduced by 20 percent, what effect will this have on simulator sales?
Correct Answer:
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