QUESTION 1

Discuss the effects of each of the following on the value of the firm:

1. A new advertising campaign increases the sales of the firm substantially
2. A new competitor enters the market
3. The production department achieves a technological breakthrough that reduces production costs
4. The rate of inflation changes

QUESTION 2

Edward operates a pizza shop, selling local-flavored pizzas. The demand function is given as:

Qx = 4000 – 1000Px + 25Y

Where:

Qx = quantity of pizza demanded,

Px = price of pizza ($35) and

Y = average consumer’s income ($1500)

1. Formulate the demand curve function for pizza (express price as a function of quantity) and calculate the quantity demanded pizza.
2. Compute the difference in the total revenue that can be earned at the current price and at $20.75. At which price is total revenue the highest and what should the firm do?

QUESTION 3

Individual consumer demand declines for inferior goods as personal income increases because consumers replace them with more desirable alternatives. Is an inverse relationship between demand and consumers’ income likely for such products? Explain.

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