Option One:
Note: The following is a regression equation. Standard errors are in parentheses for the demand for widgets.
QD = - 5200 - 42P + 20PX + 5.2I + 0.20A + 0.25M
(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 elasticities 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
Part One: Elasticities
- Price Elasticities Of Demand (Price Of Product)
- Original Demand
QD= - 5200 – 42(5) + 20(6) + 5.2(5500) + 0.20(10000) + 0.25(5000)
QD=-5,200-210+120+28,600+2000+1250= 26,560
- New price and demand level
Standard error of the product’s price=
New price level=5+0.175=$5.175 per 3-pack unit
QD = - 5200 - 42P (new) + 20PX + 5.2I + 0.20A + 0.25M
New value of demand QD (new) = - 5200 – 42(5.175) + 20(6) + 5.2(5500) + 0.20(10000) + 0.25(5000)
New value of demand QD (new) =-5,200-217.35+120+28,600+2000+1250= 26,552.65
- Change in demand due to change in price of product
Original demand value=26,560 (3-pack units)
New demand value= 26,552.65 (3-pack units)
Change in demand= 26,552.65-26,560= -7.35
- Elasticity
Elasticity=ղ= (Viton, 2017).
Elasticity=ղ=
Elasticity=ղ= =7.9066×10-3
Elasticity=ղ= - 0.0079066
- Cross Elasticity of Demand
- Original Demand
QD= - 5200 – 42(5) + 20(6) + 5.2(5500) + 0.20(10000) + 0.25(5000)
QD=-5,200-210+120+28,600+2000+1250= 26,560
- New price and demand level
Standard error of the price of leading competitor’s product =
New price level=6+0.062=$6.062 per 3-pack unit
QD = - 5200 - 42P + 20 PX(new) + 5.2I + 0.20A + 0.25M
New value of demand QD (new) = - 5200 – 42(5) + 20(6.062) + 5.2(5500) + 0.20(10000) + 0.25(5000)
New value of demand QD (new) =-5,200-210+121.44+28,600+2000+1250= 26,561.24
- Change in demand due to change in price of product
Original demand value=26,560 (3-pack units)
New demand value= 26,561.44 (3-pack units)
Change in demand= 26,561.24-26,560= 1.24
- Elasticity
Elasticity=ղ= (Viton,2017).
Elasticity=ղ=
Elasticity=ղ= =7.9066×10-3
Elasticity=ղ= 0.004518
- Per Capita Income Elasticity Of Demand
- Original Demand
QD= - 5200 – 42(5) + 20(6) + 5.2(5500) + 0.20(10000) + 0.25(5000)
QD=-5,200-210+120+28,600+2000+1250= 26,560
- New per capita and demand level
Standard error of the per capita income = 2.5
New price level=5500+2.5=$5502.5 per 3-pack unit
QD = - 5200 - 42P + 20 PX+ 5.2I (new) + 0.20A + 0.25M
New value of demand QD (new) = - 5200 – 42(5) + 20(6) + 5.2(5502.5) + 0.20(10000) + 0.25(5000)
New value of demand QD (new) =-5,200-210+120+28,613+2000+1250= 26,453
- Change in demand due to change in per capita income
Original demand value=26,560 (3-pack units)
New demand value= 26,453 (3-pack units)
Change in demand= 26,453-26,560= -107
- Elasticity
Elasticity=ղ= (Viton,2017).
Elasticity=ղ=
Elasticity=ղ= =-8.863
Elasticity=ղ= -8.863
- Monthly Advertising Expenditures Elasticity Of Demand
- Original Demand
QD= - 5200 – 42(5) + 20(6) + 5.2(5500) + 0.20(10000) + 0.25(5000)
QD=-5,200-210+120+28,600+2000+1250= 26,560
- New cost and demand level
Standard error of the monthly advertising expenditures = 0.09
New price level=$10,000+0.09=$$10,000.09 per 3-pack unit
QD = - 5200 - 42P + 20 PX + 5.2I + 0.20A (new) + 0.25M
New value of demand QD (new) = - 5200 – 42(5) + 20(6) + 5.2(5500) + 0.20(10000) + 0.25(5000)
New value of demand QD (new) =-5,200-210+120+28,600+2000.018+1250= 26,560.018
- Change in demand due to change monthly advertising expenditures
Original demand value=26,560 (3-pack units)
New demand value= 26,560.018 (3-pack units)
Change in demand= 26,560.018-26,560= 0.018
- Elasticity
Elasticity=ղ= (Viton,2017).
Elasticity=ղ=
Elasticity=ղ=
Elasticity=ղ= 0.00753
- Number of Microwave Ovens Sold Elasticity of Demand
- Original Demand
QD= - 5200 – 42(5) + 20(6) + 5.2(5500) + 0.20(10000) + 0.25(5000)
QD=-5,200-210+120+28,600+2000+1250= 26,560
- New numbers and demand level
Standard error of number of microwave ovens sold = 0.21
New price level=$5,000+0.21=$5000.21 per 3-pack unit
QD = - 5200 - 42P + 20 PX + 5.2I + 0.20A (new) + 0.25M
New value of demand QD (new) = - 5200 – 42(5) + 20(6) + 5.2(5500) + 0.20(10000) + 0.25(5000.21)
New value of demand QD (new) =-5,200-210+120+28,600+2000 +1250.0525= 26,560.0525
- Change in demand due to number of microwave ovens sold
Original demand value=26,560 (3-pack units)
New demand value= 26,560.0525 (3-pack units)
Change in demand= 26,560.0525-26,560= 0.0525
- Elasticity
Elasticity=ղ= (Viton, 2017).
Elasticity=ղ=
Elasticity=ղ= 0.00471
Part Two: Implications of the Computed Elasticities
- Price Elasticities Of Demand (Price Of Product)
The price elasticities of demand 0.0079066, implies that an increase in price by one dollar reduces the demand for a 3-pack unit by 0.79066 percent. In regards to short-term pricing strategies, the price elasticity of demand has minimal effects on the companies pricing strategy; since, it is considerably inelastic. However, the price elasticity of demand may have considerable effects on the long-term pricing strategy due to changes in the market dynamics in the low-calorie, and frozen microwavable food industry.
- Cross Elasticity Of Demand
Notably, the cross-price elasticity of demand (based on price of leading competitor’s product) is approximately 0.004518. This implies that an increase in price of leading competitor’s product by one dollar increases the demand a 3-pack unit of the original product by 0.4518 percent. Since the cross-price elasticity of demand in considerably inelastic, the elasticity has no effect on short-term pricing strategies. However, the elasticity may have considerable effects on the long-term pricing strategy due to changes in the market dynamics in the low-calorie, and frozen microwavable food industry
- Per capita income elasticity of demand
The per capita income elasticity of demand is approximately 8.863. This implies that an increase in per capita income by one dollar reduces the demand of a 3-pack unit of the original product by 800.863percent.Given the high elasticity of demand due to changes in per capita income, the elasticity has considerable impacts on short-time and long-term pricing strategies. This is because changes in per capita income adversely influence consumer choice in the short and long-term periods, and changes involve long-term economic changes; hence, the may affect a company’s pricing in the long-term.
- Advertising Expenditure Elasticity
Further, the monthly advertising expenditures elasticity of demand is approximately 0.00753. This indicates that an increase in monthly advertising expenditures by one dollar increases the demand a 3-pack unit of the original product by 0.753 percent. Noting that the advertising expenditure elasticity of demand is inelastic, the elasticity has minimal effects on the company’s short-term pricing strategy. Nonetheless, the elasticity may affect long-term pricing strategies due to adjustments in factors such a competitor advertising strategies and government regulations.
- The number of microwave ovens sold elasticity of demand
The number of microwave ovens sold elasticity of demand is approximately 0.00753; thus, indicating that an increase in the number of microwaves sold by one increases the demand a 3-pack unit of the original product by 0.471 percent. Since the elasticity is inelastic, it has minimal effects on the short-term pricing strategy for the low-calorie, and frozen microwavable food industry. Despite the inelasticity associated with the number of microwave oven sold, the elasticity may have some effects on the pricing strategy for low-calorie, and frozen microwavable food industry. This is because new microwave models may be developed thus leading to increased food safety. Consequently, this would lead to high elasticity of demand due to changes in the number of microwaves sold.
Part Three: Recommendations on Price Cuts
Notably, the price elasticity of demand for the low-calorie, and frozen microwavable food is inelastic. Therefore, a strategy involving reduction in price would have a minimal effect on the amount of food demanded and consequently, the company’s market share (Boundless, 2017). As such, the company should not adopt the price reduction strategy, but rather the company should place more emphasis on increasing its advertising expenditure.
Part Four: Demand and Supply Curve
Based on the demand and supply curve above, the equilibrium quantity and price are approximately 14,500 three-pack units and $290 cents. Further, a number of factors can cause changes in the demand and supply for the low-calorie, frozen microwavable food. These include competitor prices, prices of the commodity, changes in technology and government regulations (Boundless, 2017).
Notably, Boundless (2016) indicates that short-term changes in the market for low-calorie, and frozen microwavable food industry have minimal effects on the supply. This is because during the short-run, the aggregate supply is upward sloping since the prices of some inputs are fixed; therefore, additional production faces considerable bottlenecks (Boundless, 2016). However, in the long-run majority of the input prices can be changed; hence, changes in the market for low-calorie, and frozen microwavable food industry have significant effects on long-run supply. In regards to demand, short-term changes in the market for low-calorie, and frozen microwavable food industry have minimal effects (Boundless, 2016). This is because consumer incomes and preferences may not allow consumers to shift easily to another brand. However, in the long run period consumers can shift to different brands or adjust their spending to suit a more satisfying brand (Boundless, 2016).
Further, shifts in demand and supply curves are caused by a number of factors. Particularly, shifts of the demand curve to the right are caused by factors such as increased incomes, and changes in consumer preferences. To the contrary, shifts of the demand curve to the left can be caused by decline in consumer incomes, and changes in consumer preferences (Boundless, 2017). Additionally, factors such as new production technology, entrance of new producers in a market and government policies such as subsidies, may shift the supply curve to the left. Nonetheless, exit of producers in a particular market and government policies may cause a shift in the supply curve to the right (Boundless, 2017).
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