Heading: Demand and Supply Estimations
Assignment 1: Demand and Supply Estimation
Varney Momo Bafalie
Dr. Emmanuel Obi
Managerial Economics and Globalization
April 26, 2014
Managerial Economics: Applications, Strategies and Tactics, Mcguigan/Moyer/Harris 13th Edition, 2014
Imagine that you work for the maker of a leading brand of low-calorie, frozen microwavable food that estimates the following demand equation for their product using data from 26 supermarkets around the country for the month of April.
Note: The following is a regression equation. Standard errors are in parenthesis for the demand of widgets.
QD= - 5200 - 42P + 20Px + 5.2I + ...view middle of the document...
25) (5000/17650) = 0.07
2. Determine the implications for each of the computed elasticity 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. That is a 1% increase in price of the product will make quantity demanded to drop by 1.19%. Thus, the demand for this product is somewhat elastic. Consequently, increase in income may drive consumers away.
Cross- price elasticity is 0.68 that is if the price of the competitor’s product goes up by 1%, then quantity demanded of this product with increase by 0.68%. This product is fairly inelastic to a competitor’s price and there exists no need to be concerned about the competitor since 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 0.11, which means that A 1% increase in advertising expense will raise the quantity demanded by 0.11%. Therefore, demand is rather inelastic to advertising. For that reason, more advertisement doesn’t automatically means a company can raise the price because that still could drive consumers 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.
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.
Since the price elasticity is greater than one in absolute value, a decrease in price will lead to an even greater increase in quantity demanded (in % terms), leading to an increase in market shares. Yes, cutting the price will lead to an increase in the company share as the PED is bigger than (1.19).
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.
i) Plot the demand curve for the firm.
ii) Plot the corresponding supply curve on the same graph using the supply function Q = 5200 + 45P (Q= -7909.89+79.0989P) with the same prices.
iii) Determine the equilibrium price and quantity
iv) 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...