Imagine that you work for
the maker of a leading brand of low-calorie, frozen microwavable food that
estimates the following demand equation for its product using data from their
26 supermarkets around the country for the month of April.
Note:The following is a regression equation. Standard
errors are in parentheses.
QD = -3,500 – 150P + 30A +
75PX + 10Y
(5,234) (2.29) (5.25)
(1.75) (1.5)
R2 = 0.90 n
= 26 F = 35.25
Your supervisor has asked
you to compute the elasticities for each independent variable. Assume the
following values for the independent variables:
·
QD
= Quantity demanded of a unit (dependent variable)
·
P (in
cents) = 300 cents per unit (price per
unit)
·
A (in
dollars) = $750 (monthly advertising expenditures)
·
PX (in
cents) = 200 cents per unit (price of leading
competitor’s product)
·
Y (in
dollars) = $10,000 (per capita income)
Write a four to six (4-6)
page paper in which you:
1. Compute the
elasticities for each independent variable. Note:Write
down all of your calculations.
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.
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.
4. Assume that all
the factors affecting demand in this model (A, PX and Y) remain the same.
·
·
o Plot the demand curve for the firm using these
prices: 100, 200, 300, 400, 500, 600, 700, and 800 cents.
o The equation for the firm’s supply curve is: Qs = -7909.79 + 79.0989 P, where Qs is quantity supplied and P is price.
Plot the supply curve, Qs, using the same prices 100, 200, 300, 400, 500,
600, 700, and 800 cents.
5. Determine the
equilibrium price and quantity. (Show this graphically and/or calculate using
algebra.)
6. What short-term
and long-term changes in market conditions could shift the demand and supply
curves for this product?
7. Use at least three (3)
quality academic resources in this assignment.
APA Format
4 Pages
3 References
