ECO550 Week 3 Assignment 1
QD = - 5200 – 42P + 20C + 5.2(I) + 0.20(A) + 0.25(M)
By converting the cent values into dollars and by putting the values of Price, competitions, income, Advertisement and number of oven, we shall have the following demand.
So 500 cents= 5 Dollar
600 Cents= 6 Dollars
QD = -5200-210+120+28600+2000+1250
QD = 26,560 units
Ep ( Price elasticity of demand)
Own price elasticity of demand (ep) = ∂Q∂P×PQ
∂Q∂P = -42, P = 5, Q = 26,560
Own Price elasticity (ep) = - 42 × 526,560 x 100= - 0.79 (approx.)
EX (Cross Price elasticity-in terms of competitors’ products)
Cross price ...view middle of the document...
45%. The cross price elasticity is less than 1, which shows that people are less likely to switch over to the competitors’ goods even for a price change. Therefore, an increase in the price may lead to higher net revenues (price x quantity may be higher than the current price x quantity).This product is fairly inelastic to a competitor’s price and there is no need to be concerned about the competitor since their pricing won’t affect sales. (Kreps, 2013)
Income-elasticity is 1.077. This indicates that a 1% rise in the average area income will boost the quantity demanded by 1.077%. This ratio is almost equal to 1, which means that people’s income is directly proportionate to the quantity demanded by these persons. Therefore, the price should be made affordable so that more people would be able to purchase the item. This again, may result in a higher net revenue than if price was higher but less people purchased the goods.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 0.075. which means that a 1% increase in advertising expenses will raise the quantity demanded by only 0.075%. The advertisement elasticity is very low; this means that very few people would purchase the items sold even after substantial funds have been spent on advertisement. Therefore, advertisement is not very beneficial.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 0.047, which shows an elevation of 1% in the number of ovens in the area increasing the quantity demanded by a mere 0.047%. Therefore, in this aspect, demand is inelastic and the pricing strategy can simply skip this element.The supply elasticity being low shows that the suppliers will not change their quantity too much even if the price increased or decreased. However, a supplier is unlikely to sell an item below cost. (Henderson, 1958)
The following factors should be considered:
* Price elasticity of less than 1 shows that the net percentage increase in the quantity of the products demanded will be lesser than percent change required in the price. Thus, a higher percentage of price cut will only attract a small percent of new customers.
* Due to low cross price elasticity, very few people are likely to switch over from competitors’ to their products.
* The supply elasticity is very low, which means that price cuts won’t increase the quantities provided. Therefore, increase in the net revenue from increased quantities in the quantity x price formula will not be possible.
Hence, the firm should not cut its price.
A. Plot the demand curve for the firm.
With all other factors constant, the...