Income elasticity of demand IED IED 028234393 754515 13256 016070 The mustard

Income elasticity of demand ied ied 028234393 754515

This preview shows page 5 - 7 out of 10 pages.

Income elasticity of demand (IED): IED = −0.28234393 ∗ ( 7545.15 13.256 ) = −0.16070 The mustard oil is an inferior good (IED<0). When the income is increasing the consumer tends to avoid these goods. In other words, demand of inferior goods is inversely related to the income of the consumer. Cross Price Elasticity of Demand: CPED= 117.4 ∗ ( 109.14 13.256 ) = 0.96658 Q3. What would be the impact of a price change by HOI on the total revenue of Maa mustard oil, keeping other variables constant? Answer: The Price elasticity of demand for Maa Mustard Oil is 0.9417 which means the demand is inelastic i.e. when the price goes up, consumers’ buying habits stay about the same, and when the p rice goes down, consumers’ buying habits also remain unchanged. Hence, with increase in the price, total revenue increases and for decrease in the price, total revenue decreases Q4. What is the optimum price at which total revenue can be maximized for Maa mustard oil if the competitors’ price do not increase in October 2015 (scenario 1)? If competitors increase their prices by around 6 per cent, as suggested in the case (scenario 2), what would be the optimum price? Does the company benefit if competitors increase their prices? Perform all calculations under the assumption of no increase in promotional expenditure in the next month and a 1-per- cent increase in the per capita income of consumers. Answer: Scenario 1: Competitive Price: 109.14 (unchanged) Per capita Income: 7545.15 (for Sep-2015) Since there is a 1 % increase in the per capita income of consumers, therefore For October 2015, per capita income = ( 101 100 ) ∗ 7545.15 = 7620.60
Image of page 5
Promotional expenditure = 1247.31 (unchanged) Let P be the price of Maa Mustard Oil in Scenario 1 We know that, Demand function for Maa Mustard OIL = 5024.58 136.62 X1 + 117.41 X2 0.2823 X3 + 7.87 X4 Where X1 = Price of Maa Mustard Oil X2= Price of competitor's products X3= Per capita income of consumers X4= Promotional expenditure of Maa mustard oil Substituting the above values, in the Demand Function Q= 25503.74172 136.62P -------------------(1) Since, Total revenue (TR) = PQ (i.e. Price * Quantity) Multiplying P on both sides in equation (1), PQ = 25503.74172P 136.62 𝑃 2 First derivative of TR w.r.t. P, 𝑑𝑇𝑅 𝑑𝑃 = 25503.74172 − 136.62(2𝑃) --------------------(2)
Image of page 6
Image of page 7

You've reached the end of your free preview.

Want to read all 10 pages?

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes