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

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)

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- Summer '17
- Supply And Demand, Maa Mustard Oil