Answer to Question #82403 in Macroeconomics for uzair

Question

6. Joy’s Frozen Yogurt shops have enjoyed rapid growth in northeastern states in recent years. From
the analysis of Joy’s various outlets, it was found that the demand curve follows this pattern:
Q = 200 - 300P + 120I + 65T - 250Ac + 400Aj


a. What would be the effect of a $5,000 increase in the competitor’s advertising expenditure?
Illustrate the effect on the outlet’s demand curve.
b. What would Joy’s advertising expenditure have to be to counteract this effect?

Answer 1

Q = 200 - 300P + 120I + 65T - 250Ac + 400Aj

a. The effect of a $5,000 increase in the competitor’s advertising expenditure will cause the decrease in Joy's demand of 250*5,000 = $1,250,000.

b. Joy’s advertising expenditure would have to increase by 1,250,000/400 = $3,125 to counteract this effect.