Questions And Solutions On Demand Estimation Assignment (Term Paper Sample)

Elasticity
option 1
When P= 500,
C=600,
I=5,500,
A=10,000,
M=5000, from the given regression equation ,
QD= - 5200 – 42 x (500) + 20 x (600) + 5.2 x (5500) + 0.20 x (10000) + 0.25(5000)= 17,650
Price Elasticity = (P/Q) × (σQ/σP)
From the given regression equation, σQ/σP = -42.
Therefore Price Elasticity (Ep) = (P/Q) × (-42)×(500/17650) = -1.19, similarly
Ec = 20 × (600/17560) = 0.68
EA= (P/Q) x (0.20) x (10000/17650) = 0.11
EI = (P/Q) x (5.2) x (5500/17650) = 1.62
EM = (P/Q) x (0.25) x (5000/17650) = 0.07
Implications for each of the computed elasticity
Price Elasticity = – 1.19
This means that 1% increase in price of this product will have an effect of the quantity demanded to dropping by 1.19%. Therefore, the demand for this product is elastic. On the other hand, increase in income of the customer may drive consumers away.
Cross- price elasticity = 0.68
Which means that, if the price of the competitor’s product increases by 1%, then quantity demanded of the product in question will increase by 0.68%. This product is quite inelastic to a competitor’s price. There exists no need to be concerned about the competitor products since their pricing won’t affect sales of the product in question.
Income-elasticity = 1.62.
This shows that a 1% increase in the average area income will directly boost the quantity demanded by 1.62%. In our case, the product is elastic and the company can make a decision to raise the price at any time in case the average income rises.
Advertisement-elasticity = 0.11
Which implies that a 1% rise in advertising expenses, will directly raise the quantity demanded by 0.11%. Thus, demand is rather inelastic to advertising in this case. For that reason, more advertisement doesn’t automatically mean a company could raise the price because that still can their drive consumers away.
With respect to microwave ovens in the area, elasticity will be 0.07, which indicates an elevation of 1% in the number of ovens in the area increasing the quantity demanded by 0.07%. Thus, in this case, demand is inelastic and the pricing strategy can simply skip this element.
3. Recommendation
The firm should decrease its price - As we have seen the price elasticity is greater than one in absolute value. Thus a decrease in price of a product will lead to an greater increase in percentage of quantity demanded, which will then leading to an increase in market shares of that product. Cutting the price will therefore lead to an increase in the company’s share because the PED is bigger than one.
4.
Q = -5200 – 42 x (P) + 20 x (600) +5.2 x (5500) +0.2 x (10,000) +0.25 x (5000)
Q = 38,650 – 42 x P
P = 38 x 650/42 - Q/42
Q = 5200 =45 x P
P = - 5200/45 + Q/45
Therefore, solving both demand and supply curves simultaneously
38,650 – 42 x P = 5200 + 45 x P
87P = 33,450
P = 384.48 AND
Q = 5200 + 45 x (384.48)
Q = 22,501.6
Thus, the equilibrium price will be 384 cents and the equilibrium quantity will be 22,501 units. The equilibrium price and quantity are seen on the graph at the point where the supply and demand intercept.
As in the demand equation, demand of the low-calorie food will change if there is a change in the consumer income, also the competitor product pricing, and the correlation of the price and goods. This change will also happen if consumer preference changes (e.g. consciousness of customer towards low-calorie food). Supply of the product might change in case there is number of product suppliers change, production technological changes and development and other elements e.g. availability of labor and raw materials change, which have direct affect production costs.
5.