Option (in dollars) = Per capita income of

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 + 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:

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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

 

 

 

1.         Compute
the elasticities for each independent variable. Note: Write down all of your
calculations.

 

When P = 500, C = 600, I = 5500, A =
10000 and M = 5000, using regression equation,

 

QD = -5200 – 42*500 +
20*600 + 5.2*5500 + 0.2*10000 + 0.25*5000 = 17650

 

Price elasticity = (P/Q)*(dQ/dP)

 

From regression equation, dQ/dP = -42.

 

So, price elasticity EP=
(P/Q) * (-42) = (-42) * (500 / 17650) = -1.19

 

Likewise,

 

EC = 20 * 600 / 17650 =
0.68

 

EI ­= 5.2 * 5500 / 17650 =
1.62

 

EA = 0.20 * 10000 /
17650 = 0.11

 

EM = 0.25 * 5000 / 17650
= 0.07

2.         Determine
the implications for each of the computed elasticities for the business in
terms of short-term and long-term pricing strategies. Provide a rationale in
which you cite your results.

 

Price elasticity is
-1.19.  This indicates a 1% increase in the price of the product,
which makes the quantity demanded to drop by 1.19%.  Therefore, the
demand of this product is somewhat elastic.  Consequently, increase
in price may drive customers away.

Cross-price elasticity is 0.68.  If the
price of a competitor’s product goes up by 1%, then quantity demanded of this
product will increase by 0.68%.   This product is fairly
inelastic to a competitor’s price and there is no need to be concerned about
the competitor because their pricing won’t affect sales.

Income-elasticity is
1.62.  This indicates that a 1% rise in the average area income will
boost the quantity demanded by 1.62%.  In this aspect, the product is
elastic and the company can make the decision to raise the price if the average
income rises.

Advertisement elasticity is 0.11which
means that a 1% increase in advertising expenses will raise the quantity
demanded by only 0.11%.  Therefore, demand is rather inelastic to
advertising. For that reason, more advertisement doesn’t automatically mean
that a company can raise the price because that still could drive customers
away.

With respect to microwave ovens in the
area, elasticity is 0.07, which shows an elevation of 1%  in the
number of ovens in the area increasing the quantity demanded by a mere
0.07%.  Therefore, in this aspect, demand is inelastic and the
pricing strategy can simply skip this element.

Consequently, quantity demanded (as we
have seen above) is sensitive to the price of product and the income of people
but somewhat insensitive to our competitor’s price and almost completely
insensitive to advertising and the amount of microwaves existing in area.

 

3.         Recommend
whether you believe that this firm should or should not cut its price to
increase its market share. Provide support for your recommendation.

A cut in price would raise the quantity
demanded since the price elasticity is negative. Additionally, the elasticity
is a little over unity.  Revenue is maximized when the degree of
elasticity is one.  With that in mind, a price reduction will raise
the quantity demanded and will lead to a net gain in sales as elasticity moves
towards unity.  In my opinion, the firm should decrease the price
just as it would increase the market share and the revenue generated.

 

4.         Assume
that all the factors affecting demand in this model remain the same, but that
the price has changed. Further assume that the price changes are 100, 200, 300,
400, 500, 600 cents. 

A.        Plot the demand curve for the
firm.

 

With all other factors constant, the
demand equation is as follows:

 

Q = -5200 – 42*P + 20*600 + 5.2*5500 +
0.2*10000 + 0.25*5000

 

Q = 38650 – 42P

 

P = 38650/42 –
Q/42   (plotted below)

 

B.        Plot
the corresponding supply curve on the same graph using the supply function Q =
5200 + 45P with the same prices.

 

Q = 5200 + 45P

 

P = -5200/45 + Q/45

 

C.        Determine
the equilibrium price and quantity.

Solving the demand and supply equation
concurrently,

 

38650 – 42P = 5200 + 45P

 

87P = 33450

 

P = 384.48

 

And  Q = 5200 + 45*384.48 = 22501

 

Therefore, the equilibrium price is 384
cents and the equilibrium quantity is 22,501 units.  Additionally,
the equilibrium price and the quantity can be seen on the graph indicated at
the point where the supply and demand curve meets.

 

4.         Outline
the significant factors that could cause changes in supply and demand for the
product. Determine the primary manner in which both the short-term and the
long-term changes in market conditions could impact the demand for, and the
supply, of the product.

 As is pointed out in the demand
equation, demand of the low-calorie food can change if there is a change in
consumer income, the pricing of a competitor product and the price of
correlating goods (microwave oven).  This change can also happen as a
result of change in consumer preference (e.g. consciousness towards low-calorie
food).  Supply of the product can change if there is a change in the
number of product suppliers, production technological advances in addition to
other elements like labor and raw-material availability change, which directly
affect production costs.

 

5.         Indicate
the crucial factors that could cause rightward shifts and leftward shifts of
the demand and supply curves.

 

An increase in consumer income, a price
cut in the price of a complementary product (e.g., microwave ovens) could cause
a rightward shift of demand curve product; as could a population increase or
increased preference for the product (e.g., awareness towards low-calorie
food).  A decrease in consumer income or a recession (like the U.S.
has been experiencing) can cause a leftward shift of demand curve;
additionally, an increase in price of a complementary product (microwave oven
etc.) could cause the same leftward shift of demand curve.

            My overall thoughts on the
elasticity’s are that the company should cut the prices as a whole in order to
increase the market share. The microwavable product is inelastic and it is
considered to be a good that is both necessary and luxury. Both income classes,
low and middle, these consumers are going to purchase our product, and one of
the best ways to increase market share is through advertising. Coupon offering,
social media advertising, and maybe offering specials for a short period of
time are just a few ways that advertising can help increase the market share.
Thom Reece explains how coupons are beneficial to increase profits and product awareness,
coupons can entice new consumers that have been shopping at certain
competitors. “It has been a proven fact that consumers will break their routine
patterns of shopping in order to take advantage of the offer of good coupons”
(Reese, 2005). Advertising on television and the radio are just a few big
factors that help with increasing the market share which helps to generate
revenue for the company.

            SUPPLY AND DEMAND

            There are important factors that
influence supply and demand and they are the prices of the competitors and the
techniques and quality of the advertising used. There may be other brands that
are leading and they may be similar and cheaper. This would have a huge impact
on our microwavable merchandise supply and demand. Another impact on supply and
demand that could be negative is if the competitors start offering better
products along with quality and selection of the merchandise. David Garvin
states that a product that has better quality 

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