Demand Estimation Analysis of Low-Calorie Microwaveable Food
by
Megan M. Spears
Strayer University
Submitted to
Professor Hong Kim
ECO550041VA016-1142-001: Managerial Economics & Globalization
January 24, 2014
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.
For a refresher on independent and dependent variables, please go to Sophias Website and
review the Independent and Dependent Variables tutorial, located
at http://www.sophia.org/tutorials/independent-and-dependent-variables--3.
Note: Your professor will provide you with the equation and data necessary for you to complete
this assignment. You will find this information attached to Assignment 1 within the course shell.
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 price changes are 100, 200, 300, 400, 500,
600 dollars.
a. Plot the demand curve for the firm.
b. Plot the corresponding supply curve on the same graph using the supply function
Q = 5200 + 45P with the same prices.
c. Determine the equilibrium price and quantity.
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.
5. Indicate the crucial factors that could cause rightward shifts and leftward shifts of the
demand and supply curves.
6. Use at least three (3) quality academic resources in this assignment.
Date:
Professors Name:
QD = 20,000 - 10P + 1500A + 5PX + 10 I
Since R2 is considerable high, the model explains the demand quite well. Putting the
values of P, A, Px and I in the above equation, we get,
Converting all price into dollars, we get,
QD = 20,000 (10×8000) + (1500×64) + (5×9000) + (10×5000)
= 131000
Now, own price elasticity (ep) = ×
= -10, P = 8000, Q = 131000
Own Price elasticity (ep) = - 10 × = - 0.61 (approx.)
Cross price elasticity (exy) = ×
= 5, Px = 9000, Q = 131000
Cross price elasticity (exy) = 5 × = 0.34 (approx.)
Income elasticity (eI) = ×
= 10, I = 5000, Q = 131000
Income elasticity (eI) = 10 × = 0.38 (approx.)
Advertisement elasticity (eA) = ×
= 1500, A = 64, Q = 131000
Advertisement elasticity (eA) = 1500 × = 0.73 (approx.)
From the above results, we can see that the own price elasticity is - 0.61. Thus the
demand for the low-calorie microwavable food is inelastic in nature. This implies that an
increase in the price of the food leads to the fall of the quantity demanded by less than
proportionate amount.
Income elasticity of the good calculated is 0.38. This implies that the good selected is normal
good.
The cross price elasticity is 0.34. Therefore the two goods are almost substitute goods.
Finally, coming to the advertisement elasticity, we can see that the advertisement elasticity is
0.73. Thus advertisement has an important impact on the sales of the product.
Since price elasticity is less than 1, total revenue will fall if price falls. Moreover
the cross price elasticity of the product is almost close to zero. So, if the firm will never lower its
price to increase its market share.
i) The demand curve s drawn below:
ii)
iii) At these prices there is always an excess supply. Thus market forces cannot determine the
equilibrium.
iv) The factors can influence demand and supply are:
Demand Advertisement, Income, price of the competitors product, etc.
Supply technological improvement, supply shocks, etc.
Increase in advertisement expenditure can increase the demand this will shift the
demand curve rightward.
Similarly any reduction in advertisement expenditure will shift the demand curve leftward.
Similarly, a rise in per capita income will shift the demand curve rightward and viceversa.
Now, the supply curve can shift rightward if there is any improvement in the technology. On the
other hand any supply shock can shift the supply curve leftward.
References:
Varian, H. R. (2011). Intermediate Microeconomics: A Modern Approach (8th ed.). NY: Norton
Walter Nicholson, Christopher Snyder (2012). Microeconomic Theory: Basic Principles and
Extensions (11th ed.). USA: Cengage Learning
TR Jain, VK Ohri (2010). Introductory Microeconomics and Macroeconomics (7th ed.). India:
V.K.Publications
References
Brin, David (1998). The Transparent Society: Will Technology Force Us to Choose between
Prvacy and Freedom? Perseus Books. Reading, MA. (pgs 190-212)
Eltis, Karen (2011). The Judicial Syste in the Digital Age: Revisiting the Relationship between
Privacy and Accessibility in the Cyber Context. McGill Law Journal, Vol. 56, No. 2,
289+.
Solove, Daniel J. (2004). The Digital Person: Technology and Privacy in the Information Age
New York University Press. (pgs 56, 127)
Retrieved From : http://www.gwu.edu/~nsarchiv/nsa/foia.html, November 2, 2012.