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 26 supermarkets around the country for the month of April.
Estimated Demand Equationè QD= – 5200 – 42(P) + 20(Px)+ 0.52( I )+ 0.20(A) + 0.25(M)
Standard Errors of Estimate è (2.002) (17.5) (6.2) (2.5) (0.09) (0.21)
(for calculating “t-values”
Other Regression statistics n = 26 R2 = 0.55 F = 4.88
Note: In the above regression equation, QD is the “dependent variable” and the variables on the right hand side of the equation all are “independent variables. For a refresher on independent and dependent variables, please go to Sophia’s Website and review the Independent and Dependent Variables tutorial, located at org/tutorials/independent-and-dependent-variables–3” target=”_blank” rel=”nofollow noopener”>http://www.sophia.org/tutorials/independent-and-dependent-variables–3.
Your supervisor has asked you to compute the elasticities for each independent variable in the above demand equation. Assume the following values for the independent variables:
QD = Quantity demanded of 3-pack units for your company’s frozen food
P (in dollars) = Price of the product = $5 per 3-pack unit
Px (in dollars) = Price of leading competitor’s product = $6 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 each
Supermarket is located = 5,000
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 remain the same, except that the price of your company can change.
a) Plot the demand curve for your firm by using the following prices for its 3-pack unit: $2, $4. $6, $8, and $10. Hint: Place the price (P) on vertical axis and the quantity demanded (QD) on the horizontal axis.
b) Plot the corresponding supply curve on the same graph using the following supply function
QS = -79.1 + 79.1(P) with the same prices as in part a. (Remember: Price is placed on the vertical
axis and the quantity on the horizontal axis.)
c) Determine the equilibrium price and quantity.
d) 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.
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