Answer to Question #52110 in Microeconomics for Asif

Question

Muhammad Raza Company is producer of pastries. The company hires an economist to determine the demand for its product. After months of hard work, the analyst tells the company that demand for the firms pastries (Qx) are given by the following equations:
Qx = 20,000-10,000Px+10I+1000Pc
Where Px is the price charged for Raza pastries, I is the income per capita and Pc is the price of pastries form competing producer. Using this information, the company’s manager wants to:
(i) Determine what effect a price increase would have on total revenues.
(ii) Evaluate how sale of pastries would change during a period of raising income.
(iii) Assess the probable impact if competing producers raise their prices
Assume that initial values of Px = $8, I = $18,00 and Pc = $10.

Answer 1

Muhammad Raza Company is producer of pastries.
Qx = 20,000-10,000Px+10I+1000Pc
Where Px is the price charged for Raza pastries, I is the income per capita and Pc is the price of pastries form competing producer.
(i) The effect a price increase would have on total revenues will be negative, because the demand is elastic and total revenue will decrease.
(ii) Sale of pastries would decrease during a period of raising income, because the competing good is more preferable for the customers.
(iii) If competing producers raise their prices, the demand for this product will increase.