Week 3 Research paper
Running Header: Demand Estimation
Demand Estimation
Managerial Economics
October 25, 2014
Running Header: Demand Estimation
Option 1
Note: The following is a regression equation. Standard errors are in parentheses for the demand for widgets.
QD= - 5200 - 42P + 20PX + 5.2I + .20A + .25M
(2.002) (17.5) (6.2) (2.5) (0.09) (0.21)
R2 = 0.55 n = 26 F = 4.88
Your supervisor has asked you to compute the elasticity’s for each independent variable. Assume the following values for the independent variables:
Q= Quantity demanded of 3-pack units
P (in cents)= Price of the product = 500 cents per 3-pack unit
PX (in cents)= Price of leading competitor’s product = 600 cents per 3-pack unit
I (in dollars)= Per capita income of the standard metropolitan statistical area
(SMSA) in which the supermarkets are located = $5,500
A (in dollars)= Monthly advertising expenditures = $10,000
M=Number of microwave ovens sold in the SMSA in which the supermarkets are located = 5,000
Compute the elasticity’s for each independent variable. Note: Write down all of your calculations.
-42 (500)/17,650 = 1.19 (Price of product elasticity)
20 (600/17,650) = .68 (Cross elasticity)
5.2 (5,500/17,650) = 1.62 (Income elasticity)
.20 (10,000/17,650)= .11 (Advertisement elasticity)
Determine the implications for each of the computed elasticity’s for the business in terms of short-term and long-term pricing strategies. Provide a rationale in which you cite your results. The implication for each of the computed elasticity’s for the business in terms of short-term and long-term pricing strategies is the sum of the price elasticity. The increase in price would possibly motivate customers to research or find other options. The cross price elasticity increased the demand by 0.68%. The price in this case will not cause a decrease in sales because the product is inelastic. Income elasticity is 1.62% which the cost of a product can increase when the cost of productivity also
Demand Estimation
Managerial Economics
October 25, 2014
Running Header: Demand Estimation
Option 1
Note: The following is a regression equation. Standard errors are in parentheses for the demand for widgets.
QD= - 5200 - 42P + 20PX + 5.2I + .20A + .25M
(2.002) (17.5) (6.2) (2.5) (0.09) (0.21)
R2 = 0.55 n = 26 F = 4.88
Your supervisor has asked you to compute the elasticity’s for each independent variable. Assume the following values for the independent variables:
Q= Quantity demanded of 3-pack units
P (in cents)= Price of the product = 500 cents per 3-pack unit
PX (in cents)= Price of leading competitor’s product = 600 cents per 3-pack unit
I (in dollars)= Per capita income of the standard metropolitan statistical area
(SMSA) in which the supermarkets are located = $5,500
A (in dollars)= Monthly advertising expenditures = $10,000
M=Number of microwave ovens sold in the SMSA in which the supermarkets are located = 5,000
Compute the elasticity’s for each independent variable. Note: Write down all of your calculations.
-42 (500)/17,650 = 1.19 (Price of product elasticity)
20 (600/17,650) = .68 (Cross elasticity)
5.2 (5,500/17,650) = 1.62 (Income elasticity)
.20 (10,000/17,650)= .11 (Advertisement elasticity)
Determine the implications for each of the computed elasticity’s for the business in terms of short-term and long-term pricing strategies. Provide a rationale in which you cite your results. The implication for each of the computed elasticity’s for the business in terms of short-term and long-term pricing strategies is the sum of the price elasticity. The increase in price would possibly motivate customers to research or find other options. The cross price elasticity increased the demand by 0.68%. The price in this case will not cause a decrease in sales because the product is inelastic. Income elasticity is 1.62% which the cost of a product can increase when the cost of productivity also
References: Ashe-Edmunds, S. (2012). Is Cutting Prices a Good Marketing Strategy? McGuigan, J. Moyer, R. & Harris, F. (2014), Managerial Economics: Applications, Strategy and Tactics. Cengage Learning. www.mindtools.com/pages/article/ Supply and Demand curves http://www.bized.com Price-elasticity-of-demand http://www.tutor2u.net-Price-elasticity-of-demand.