ECO 550 Assignment 1.docx - Demand Estimation 1 Demand Estimation ECO 550 – Managerial Economics and Globalization Demand Estimation 2 Imagine that

ECO 550 Assignment 1.docx - Demand Estimation 1 Demand...

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Demand Estimation 1 Demand Estimation ECO 550 – Managerial Economics and Globalization
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Demand Estimation 2 Imagine that you work for the maker of a leading brand of low-calorie microwavable food that estimates the following demand equation for its product using data from 26 supermarkets around the country for the month of April. Use the following demand equation concerning the questions of this assignment. This equation has been estimated through linear regression. The independent variables are: price of the product discussed in this assignment (P), advertising expenditure (A), price of leading competitor’s product (C), per capita income (I) in the area, and number of microwave ovens sold in the area. The standard errors of estimation are in parentheses below the equation. QD = - 5200 – 42P + 20C + 5.2(I) + 0.20(A) + 0.25(M) (2) (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: QD = Quantity demanded P (in cents) = Price of the product = 500 C (in cents) = Price of leading competitor’s product = 600 I (in dollars) = Monthly average income in the area = 5,500 A (in dollars) = Monthly advertising expenditures = 10,000 M = Number of microwave ovens sold in the area = 5,000 1. Compute the elasticities for each independent variable. Note: Write down all of your calculations. When P = 500, C = 600, I = 5500, A = 10000 and M = 5000, using regression equation, Q D = -5200 - 42*500 + 20*600 + 5.2*5500 + 0.2*10000 + 0.25*5000 = 17650 Price elasticity = (P/Q)*(dQ/dP)
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Demand Estimation 3 From regression equation, dQ/dP = -42. So, price elasticity E P = (P/Q) * (-42) = (-42) * (500 / 17650) = -1.19 Similarly, E C = 20 * 600 / 17650 = 0.68 E I = 5.2 * 5500 / 17650 = 1.62 E A = 0.20 * 10000 / 17650 = 0.11 E M = 0.25 * 5000 / 17650 = 0.07 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. Price elasticity is -1.19 which means a 1% increase in price of the product causes quantity demanded to drop by 1.19%. So, the demand of the product is slightly elastic. The Price elasticity of demand indicates immediately the effect a change in price will have on the total revenue (TR)= total consumer expenditure. This could increase in price forcing the percentages
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