Economics - Assignment 2: Operations Decision

1) QD = - 5200 - 42P + 20PX + 5.2I + .20A + .25M

First we will convert all price units from dollars to cents. Then, putting the values of P, A, Px, I and M in the above equation, we get,

QD = -5200 – (42×500) + (20×600) + (5.2×550000) + (0.20×1000000) + (0.25×5000)

= 3047050

· Now, own price elasticity (ep) = ×

= -42, P = 500, Q = 3047050

Own Price elasticity (ep) = - 42× = - 0.007 (approx.)

· Cross price elasticity (exy) = ×

= 20, Px = 600, Q = 3047050

Cross price elasticity (exy) = 20 × = 0.004 (approx.)

· Income elasticity (eI) = ×

= 5.2, I = 550000, Q = 3047050 Income elasticity (eI) = 5.2 × = 0.94 (approx.)

· Advertisement elasticity (eA) = ×

= 0.2, A = 1000000, Q = 3047050

Advertisement elasticity (eA) = 0.2 × = 0.07 (approx.)

· Microwave ovens elasticity (eM) = ×

= 0.25, M = 5000, Q = 3047050

Microwave ovens elasticity (eM) = 0.25 × = 0.0004 (approx.)

2) From the above results, we can see that the own price elasticity is - 0.007. 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 0.94. This implies that the good selected is a normal good. But its elasticity is very high. The cross price elasticity is 0.004. Therefore the two goods can be considered as neutral goods. Now, coming to the advertisement elasticity, we can see that the advertisement elasticity is 0.07. Thus advertisement has an important impact on the sales of the product. Finally let us come to the microwave ovens elasticity. We can see that the microwave ovens elasticity is 0.0004. Thus, as sales of microwave ovens increase, demand for of low-calorie microwavable food doesn’t change almost.

3) 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. The cross price elasticity of the product is positive (0.005). Since the value is too low, the goods can be considered as almost neutral goods. But own price elasticity is less than 1. Therefore total revenue test states that total revenue will fall if price falls. So, the firm will never lower its price to increase its market share.

4) i) The demand curve s drawn below: ii) iii) At equilibrium, market demand = market supply. Equating them we get,

P* = 35205.17241 ≈ 35205 and Q* = 1589432.76 ≈ 1589433 iv) The factors can influence demand and supply are: Demand – Advertisement, Income, price of the competitor’s product, etc. Supply – technological improvement, supply shocks, etc.

5) Increase in income of the individual can increase the demand this will shift the demand curve rightward. Similarly fall in the income of the consumer will shift the demand curve leftward. Besides this, a rise in advertisement expenditure will shift the demand curve rightward and vice versa. 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

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