Amalgamated Popcorn, Inc

Essay

Amalgamated Popcorn, Inc. sells bags of flavored gourmet popcorn in a popular mall. As shop owner and operator, Rhea estimates the demand for flavored popcorn to be: Q = 1,200 - 800P + 2A, where A denotes advertising weekly spending (in dollars), Q is the bags of popcorn demanded and P is the price of a bag of popcorn. She is currently charging $1.50 per bag of popcorn (for which the marginal cost is $0.75) and spending $500 per week on advertising.
(a) Compute the store's price elasticity and advertising elasticity.
(b) Check whether the current $1.50 price is profit maximizing. If not, determine the store’s optimal quantity and output.
(c) Examine if the store should consider increasing its spending on advertising.