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:

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