Forum

A manufacturer of computer workstations gathered average monthly sales figures from its 56 branch offices and dealerships across the country and estimated the following demand for its product:
Q = +15,000 – 2.80P + 150A + 0.3Ppc + 0.35Pm + 0.2
Pc
(5,234) (1.29) (175) (0.12) (0.17) (0.13)
R2 = 0.68 SEE = 786 F = 21.25
The variables and their assumed value are
Q = Quantity
P = Price of basic model = 7,000
A = Advertising expenditures (in thousands) = 52
Ppc = Average price of a personal computer = 4,000
Pm = Average price of mini computer = 15,000
Pc = Average price of a leading competitor’s workstation =
8,000
a. Compute the elasticities for each variable. On this basic, discuss the ralative impact that each variable has on the demand. What implications do these results have for the firm’s marketing and pricing policies?
b. Conduct a t-test for the statistical significanse of each variable. In each case, state whether a one-tail or two-tail test on the results? Discuss the results of the t-tests in light of the policy implications mentioned.
c. C. Suppose a manager evaluating these result suggests that interest rates and the performance of the computer
(typically measured in millions of instructions per second, or
MIPS) are important determinants of the demand for workstations and must therefore be included in the study. How would you respond to this suggestion? Elaborate
Answer
a. Q = 15000 – 2.80(7000) + 150(52) + 0.3(4000) +
0.35(15000) + 0.2(8000)
= 15000 – 19600 + 7800 + 1200 + 5250 + 1600
= 11250 monthly
When the Q = 11250
Elasticity P = -2.80 (7000/11250)
= -1.742
Elasticity A = 150 (52/11250)
= 0.693
Elasticity Ppc = 0.3 (4000/11250)
= 0.107
Elasticity Pm = 0.35 (15000/11250)
= 0.467
Elasticity Pc = 0.2 (8000/11250)
= 0.142
From this answer, demand for the workstation is price elastic.
The low elasticity coefficient of 0.107 for elasticity Ppc, and elasticity Pc is 0.142. The company must focus less on their marketing and more the pricing their price to