1. Compute the elasticity for each independent variable. Note: Write down all of your calculations.
When P = 8000, A = 64,PX = 9000, I = 5000, using regression equation,
QD= 20000 - 10*8000 + 1500*64 + 5*9000 + 10*5000 = 131,000
Price elasticity = (P/Q)*(dQ/dP)
From regression equation, dQ/dP = -10.
So, price elasticity EP= (P/Q) * (-10) = (-10) * (8000 / 131000) = -0.61
Similarly,
EA = 1500 * 64 / 131000 = 0.73
EPX = 5 * 9000 / 131000 = 0.34
EI = 10* 5000 / 131000 = 0.38
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 -0.61 which means a 1% increase in price of the product causes quantity demanded to drop by 0.61%. So, the demand of the product is relatively inelastic. Therefore, increase in price may not have large impact on the customers.
Advertisement elasticity is 0.73, meaning 1% increase in advertising expenses increases quantity demanded by only 0.73%. So, demand is relatively inelastic to advertising. Therefore, more advertisement won’t necessarily mean that firm can raise the price because it still could drive customers away.
Cross-price elasticity is 0.34 which means if price of competitor product increases by 1%, then quantity demanded of this product increases by 0.34%. So, product is relatively inelastic to competitor’s price and the firm shouldn’t worry about the competitor as their pricing won’t have any major effect on its own sales.
Income-elasticity is 0.38 which means 1% rise in average income in the area boosts quantity demanded by 0.38%. So, product is relatively inelastic in this aspect and so the firm shouldn’t worry about consumer income considerations in pricing strategy. Quantity demanded won’t suffer largely from this aspect even if income increases / decreases.
Therefore, quantity demanded is relatively inelastic to all factors considered. So, company shouldn’t worry much about these factors.
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.
A price slash would increase quantity demanded, as the price elasticity is negative. But, magnitude of elasticity is a less than unity. Revenue is maximized when the magnitude of elasticity is one. Therefore, a price-cut will increase quantity demanded but will lead to a loss of sales. So, price-cut should be made only if firm is trying to strengthen its consumer base; from profit perspective, it should instead raise the price.
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 cents.
1.Plot the demand curve for the firm.
Keeping other factors constant, demand equation is
Q = 20000 - 10*8000 + 1500*64 + 5*9000 + 10*5000
Q = 211000 - 10P
P = 21100 - 0.1Q (plotted below)
2.Plot the corresponding supply curve on the same graph using the supply function Q = 5200 + 45P with the same prices.
Q = 5200 + 45P
P = -5200/45 + Q/45
3.Determine the equilibrium price and quantity.
Solving demand and supply equation simultaneously,
211000 - 10P= 5200 + 45P
55P = 211000 - 5200
P = 3741.82
and Q = 5200 + 45*3741.82 = 173,581
So, equilibrium price is 3742 cents and equilibrium quantity is 173,581 units. The equilibrium price and quantity can also be found from the graph to be the point where supply and demand curve intersect.
4.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.
As the demand equation points out, demand of the low-calorie food can change due to a change in consumer income, price of competitor product and price of related goods (microwave oven). The change can also come as a result of change in consumer preference (like awareness towards low-calorie food). Supply of the product can change due to change in number of suppliers of the product, technological advances in the production and other factors like change in availability of labor and raw-material which directly affect production costs.
5.Indicate the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves.
A rightward shift of demand curve could be caused by an increase in consumer income, a decrease in price of complementary product like microwave ovens, an increase in population or increased preference for the product like awareness towards low-calorie food. A leftward shift of demand curve can be caused by a drop in consumer income or recession, increase in price of complementary product like microwave oven etc.
A rightward shift of supply curve can be caused by technology advances in food processing, increased availability of cheap labor and raw material, increased tax-cuts and government subsidies etc. A leftward shift can be caused due to a decrease in availability / increase in price of labor and raw materials, increased taxes etc.
Demand 210000 205000 200000 195000 190000 173581.8 168581.8 163581.79999999999 158581.79999999999 153581.79999999999 148581.79999999999 100 600 1100 1600 2100 3741.82 4241.8200000000024 4741.8200000000024 5241.8200000000024 5741.8200000000024 6241.8200000000024 Supply 210000 205000 200000 195000 190000 173581.8 168581.8 163581.79999999999 158581.79999999999 153581.79999999999 148581.79999999999 4551.111111111115 4440 4328.8888888888887 4217.7777777777765 4106.6666666666761 3741.8177777777796 3630.7066666666633 3519.595555555557 3408.4844444444443 3297.373333333338 3186.2622222222217
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