Demand and supply. - DEMAND SUPPLY ESTIMATION Managerial...

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DEMAND & SUPPLY ESTIMATION Managerial Economics & Globalization Assignment 1: Demand and Supply Estimation Your name Your Instructor’s name Course Id: Your Institution’s name Date:
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DEMAND & SUPPLY ESTIMATION Demand and Supply Estimation 1. Compute the elasticity for each independent variable. Note: Write down all of your calculations. Solution: When P= 300, A= 750, Y = 10000, PX=200, By substituting values of P, A, PX and Y in the regression equation we get, Q D = - 4000 – 200(300) + 32(750) + 100(200) + 9(10000) = 70,000 As we know that: Price Elasticity (Ep) = (P/Q) (∆Q/∆P) From the regression equation ∆Q/∆P = -200. So, Price Elasticity (Ep) = (-200) (300/70000) = -0.8571 Income-elasticity (EI) = (P/Q) (9) = (10000/70000) (9) = 1.2857 Advertisement-elasticity (EA) = (P/Q) (32) = (750/70000) (32) = 0.3429
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DEMAND & SUPPLY ESTIMATION Cross- price elasticity ( Ec) = 100(200/70000) = 0.2857 2. Determine the implications for each of the computed elasticity for the business in terms of short-term and long-term pricing strategies. Provide a rationale in which you cite your results. Solution: Price Elasticity: The calculated Price Elasticity is -0.8571. It means that if the price of the product increases by 1% then the quantity demanded will reduce by 0.8571%. So, it shows that the quantity demand is elastic in result. Consequently, it leads to the situation that if the incomes of the consumers increase then this may drive them away.
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