Assignment 1: Demand Estimation

| August 20, 2015

Imagine that you work for the maker of a leading brand of low-calorie frozen, microwavable food that estimates the following demand equation for its product using data from 26 supermarkets around the country for the month of April.

For a refresher on independent and dependent variables, please go to Sophia’s Website and review the Independent and Dependent Variables tutorial, located at http://www.sophia.org/tutorials/independent-and-dependent-variables–3.

Note: The following is a regression equation. Standard errors are in parentheses for the demand for widgets.

QD       =          – 5200 – 42P + 20PX + 5.2I + .20A + .25M

(2.002)  (17.5) (6.2)    (2.5)   (0.09)   (0.21)

R2 = 0.55           n = 26               F = 4.88

Your supervisor has asked you to compute the elasticities for each independent variable. Assume the following values for the independent variables:

Q          =          Quantity demanded of 3-pack units

P (in cents)       =          Price of the product = 500 cents per 3-pack unit

PX (in cents)     =          Price of leading competitor’s product = 600 cents per 3-pack unit

I (in dollars)       =          Per capita income of the standard metropolitan statistical area

(SMSA) in which the supermarkets are located = $5,500

A (in dollars)     =          Monthly advertising expenditures = $10,000

M                     =          Number of microwave ovens sold in the SMSA in which the

supermarkets are located = 5,000

 Write a four to six (4-6) page paper in which you:

  1. Compute the elasticities for each independent variable. Note: Write down all of your calculations.
  2. Determine the implications for each of the computed elasticities for the business in terms of short-term and long-term pricing strategies. Provide a rationale in which you cite your results.
  3. Recommend whether you believe that this firm should or should not cut its price to increase its market share. Provide support for your recommendation.
  4. Assume that all the factors affecting demand in this model remain the same, but that the price has changed. Further assume that the prices are 100, 200, 300, 400, 500, 600 cents.
  5. a) Plot the demand curve for the firm.
  6. b) Plot the corresponding supply curve on the same graph using the following MC/supply function Q = -7909.89 + 79.0989P with the same prices.
  7. c) Determine the equilibrium price and quantity.
  8. d) Outline the significant factors that could cause changes in supply and demand for the product. Determine the primary manner in which both the short-term and the long-term changes in market conditions could impact the demand for, and the supply, of the product.
  1. Indicate the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves.
  2. Use at least three (3) quality academic resources in this assignment. Note: Wikipedia does not qualify as an academic resource.

 

Assignment must follow these formatting requirements:

  • Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
  • Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.

 

 

 

 

Assignment 1: HINTS

1) To answer this question, you need to first substitute the values of P, Px,  I, A and M in the demand equation to get the value of QD. [Substitute 5 not 500 cents for price of cigarette, 6 not 600 cents for price of competitor’s cigarette, in the demand equation].

 

Use the value of QD and the corresponding value of P to calculate the own price elasticity of demand.

 

Use the value of QD and the corresponding value of PX to calculate the cross price elasticity of demand.

 

Use the value of QD and the corresponding value of I to calculate the income elasticity of demand.

 

Use the value of QD and the corresponding value of A to calculate the advertising elasticity of demand

 

Use the value of QD and the corresponding value of M to calculate the elasticity of microwave ovens sold

Use your calculated values of different elasticities and interpret it.

 

2) Based on the above results, consider what is the short-run and long-run business strategies.

 

3) This question has to be answered in light of own-price elasticity of demand you have calculated.

 

4a) To answer this question, you have to first determine the demand equation. Therefore, you need to substitute the values of Px,  I, A and M in the estimated demand equation. [Substitute 5 not 500 cents for price of cigarette, 6 not 600 cents for price of competitor’s cigarette, in the demand equation].

 

Plug/substitute the values of P = 100, 200, 300, 400, 500 and 600 in the demand equation and draw a demand curve [You can use Excel spreadsheet to graph it or use graph paper, pencil and ruler and draw it. In the latter case you can scan and submit it].

4b & 4c) The supply equation is given in Assignment 1. Plug/substitute the values of P = 100, 200, 300, 400, 500 and 600 in the supply equation and draw a supply curve [You can use Excel spreadsheet to graph it or use graph paper, pencil and ruler and draw it. In the latter case you can scan and submit it]. You need to draw the demand and supply curves in one chart to determine equilibrium price and quantity.

 

You should also determine the equilibrium price and quantity by equating the demand and supply equations.

 

4d) Look at the signs of the coefficients of the demand equation to determine the shifts of demand and answer accordingly.

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