# Economic Analysis Tutorial

Topics: Supply and demand, Price point, Inverse demand function Pages: 2 (419 words) Published: April 26, 2013
1.

Fukaku Footwear wished to estimate the demand function for its ‘Elite VS600’ women’s shoes. The company’s economist believed that the main determinants of ‘Elite VS600’ shoes are: i) ii) iii) iv) the price of the shoes (Px) the price of a competitor’s shoes Dr. Martin (Py) the price of another competitor’s shoes ‘Madame69’ (Pz) and disposable per capita income (Y)

A regression was run by using SPSS package and the result is shown as follows: LS//Dependent Variable is Qx Variable Coefficient C 250.7 Px -410.3 Py 240.3 Pz 180.3 Y 1.23 R-Squared = 0.857 S.E of regression = 265.6 Qx represents quantity (pairs) demanded per month. The current values of the dependent variables are Px = \$80, Py = \$75, Pz \$82.5 and Y = \$5250 a) Calculate the price and income elasticities of demand for ‘Elite VS600’ shoes. What do these values mean?

Standard Error -150.3 180.5 70.4 0.23

t-statistic 2.73 1.33 2.56 5.36

Find Qx; Qx = C – Px + Py + Pz + Y = 250.7 – 410.3Px + 240.3Py + 180.3Pz + 1.23Y = 250.7 – 410.3(80) + 240.3(75) + 180.3(82.5) + 1.23(5250) = 6781.45

i)

= -4.84 (elastic)
ii)

= 0.952 (necessity goods)
b) Derive the equation of the demand curve and write it in the conventional way.

Qx Px

= 250.7 – 410.3Px + 240.3(75) + 180.3(82.5) + 1.23(5250) = 39605.45 – 410.3Px = 96.528 – 0.00244Qx

c)

Suppose that the marginal cost of Elite VS600 is constant at \$50, what is the profit maximizing price and output?

» MC = MR Given MC = 50 Find MR = TR =PxQ = (96.528 – 0.00244Qx) x Qx = 96.528Qx – 0.00244Qx2 = 96.528 – 0.00488Qx » MC = MR = 50 96.528 – 0.00488Qx = 50 Qx = 9534.43 → (i) Put (i) into Px demand curve, Px = 96.528 – 0.00244 (9534.43) = 73.26 d) At the profit maximizing price, what range of sales volume can be expected at 95% confidence limits?

MR =

At max TR; Px = 73.26 Qx = 9534.43 Given SEE = 265.6 t interval value (Rule of Thumb) = 2 SEE = Q + t-value (SEE) = (+) 9534.43 + 2 (265.6) = 10065.63 = (-) 9534.43 - 2 (265.6) =...