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Elasticity Essay

703 words - 3 pages

Ans a: Qh = 205.2 – 200*Ph + 100*Pc + 0.023*A + 0.0005*I
Interpret the coefficients in the estimated regression.
The quanitity of hamburgers purchased is defined by the demand curve produced by the estimated regression equation
The Y axis intercept ( The point where the demand curve crosses the y-axis) of 205.2 may or may not have any meaning or value in this analysis
The coefficient of the hamburger’s price affects the quantity of the hamburger in a negative manner. An increase of one unit (one dollar) of the price of the hamburger will decrease the quantity of demand by 200 units (Quantity of hamburger purchased)
The coefficient of the price of the chicken affects the quantity of the hamburger in a positive manner. When the price of chicken increases, then the customers will tend to substitute it with hamburgers in their meals. Hence, an increase of one dollar in the price of the chicken will increase the quantity of the hamburgers purchased by 100 units
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If price were to decrease by 1% would the total revenue for hamburger increase or decrease? Explain.
Own price elasticity: This quantity measures the responsiveness of the quantity demanded to change in the price of the good. It measures the sensitivity of quantity demanded to a change in its own price= (DQh/DPh)*(Ph/Qh) = -200(1/230.2) =-0.87. If the price decreases by 1% the quantity of demand will increase by 0.87%. This is an inelastic demand and increasing the price by 1% will increase the total revenue and quantity purchased will not significantly decrease. The reverse holds true, a decrease in the price will decrease the total revenue because of the inelastic nature of the demand
Ans d: Calculate the cross price elasticity with respect to chicken price, the advertising elasticity and the income elasticity using the information listed and calculated in (b). Interpret the economic meaning of these measures.
Cross price elasticity: When the price of the own good is replaced by the substitute like the chicken then the cross price elasticity is considered. (DQh/DPc)*(Pc/Qh)= 100*1.20(230.2)=0.52. A 1 unit change in the price of chicken causes Qh to change by 100. So when Pc = 1.20, cross price elasticity equals = 0.52 This says that if the price of chicken changes, the quantity of hamburger demanded will change in the same direction. This seems to make market sense since chicken could be a substitute for hamburger. A 1% increase in the chiken price will increase the quantity demand of the hamburger by 0.52%. This shows that there is moderate relationship between the price of the chicken and the quanity of hamburger purchased
Advertising elasticity: This parameter would provide the depednce og the qunaitty of demand with respect ot eh advertising costs. (DQh/DA)*(A/Qh) = 0.023*(5000/230.2) = 0.5. This shows that when the advertising price is 5000 the elasticity in 0.5. The advertising acitivity has a psotive impact and it changes in the same direction as the quantity of demand of the hamburger. A 1% increase int eh advertising cost will increase the demand by 0.5%. There is again a moderate relationship between the advertising the quantity of demand
Income elasticity: This parameter will provide the categorization og the good inot inferior, normal and luxury. If the em

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