Assignment 1: Demand and Supply Estimation

Option 1: Note: The following is a regression equation. Standard errors are in parenthesis for the demand of widgets. QD= - 5200 - 42P + 20Px + 5.2I + 0.20A + 0.25M (2.002) (17.5) (6.2) (2.5) (0.09) (0.21) R2= 0.55, N = 26 F= 4.88 Your supervisor has asked you to compute the elasticity for each independent variable. Assume the following values for the independent variables: Q D = Quantity demanded (Quantity demanded of 3-pack units) P (in cents) per case = Price of the product = 500 cents PX (in cents) = Price of leading competitor’s product = 600 cents I (in dollars) = Per capita income of the standard metropolitan statistical area (SMSA) where the supermarkets are located = 5500 $ A (in dollars) = Monthly advertising expenditures = $10,000 M = Number of microwave ovens sold in the SMSA in which the supermarkets are located = 5,000 Managerial Economics & Globalization Assignment 1: Demand and Supply Estimation Your name Your Instructor’s name Course Id: Your Institution’s name Date: Demand and Supply Estimation 1. Compute the elasticity for each independent variable. Note: Write down all of your calculations. Solution: When P= 500, M= 5000, A= 10,000, I = 5,500, C=600, By putting values of P, M, A, I and C in the regression equation we get, QD= - 5200 – 42(500) + 20(600) + 5.2(5500) + 0.20(10000) + 0.25(5000) = 17,650 As we know that: Price Elasticity (Ep) = (P/Q) (∆Q/∆P) From the regression equation we get, ∆Q/∆P = -42. So, Price Elasticity (Ep) = (P/Q) (-42) (500/17650) = -1.19, similarly, (Microwave oven’s Elasticity (EM) = (P/Q) (0.25) (5000/17650) = 0.07 Income-elasticity (EI) = (P/Q) (5.2) (5500/17650) = 1.62 Advertisement-elasticity (EA) = (P/Q) (0.20) (10000/17650) = 0.11 Cross- price elasticity ( Ec) = 20(600/17560) = 0.68 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. Solution: Price Elasticity: The calculated Price Elasticity is – 1.19. It means that if there is made an increase of 1% in the price of the product then it will drop the quantity...

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