# What's the estimated demand equation?

*label*Business Finance

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### Question Description

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.

For a refresher on independent and dependent variables, please go to Sophia’s Website and review the Independent and Dependent Variables tutorial, located at http://www.sophia.org/tutorials/independent-and-dependent-variables--3.

**Option 1**

**Note:** The following is a regression equation. Standard errors are in parentheses for the demand for 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 elasticities for each independent variable. Assume the following values for the independent variables:

Q = Quantity demanded of 3-pack units

P (in cents) = Price of the product = 500 cents per 3-pack unit

PX (in cents) = Price of leading competitor’s product = 600 cents 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 the

supermarkets are located = 5,000

Write a four to six (4-6) page paper in which you:

- Compute the elasticities for each independent variable.
**Note:**Write down all of your calculations. - 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.
- Recommend whether you believe that this firm should or should not cut its price to increase its market share. Provide support for your recommendation.
- Assume
that all the factors affecting demand in this model remain the same,
but that the price has changed. Further assume that the price changes
are 100, 200, 300, 400, 500, 600 cents.
- Plot the demand curve for the firm.
- Plot the corresponding supply curve on the same graph using the following MC / supply function Q = -7909.89 + 79.1P with the same prices.
- Determine the equilibrium price and quantity.
- Outline the significant factors that could cause changes in supply and demand for the low-calorie, frozen microwavable food. 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.

- Indicate the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves for the low-calorie, frozen microwavable food.
- Use at least three (3) quality academic resources in this assignment.
**Note:**Wikipedia does not qualify as an academic resource.

## Tutor Answer

Attached.

Running Header: ESTIMATED DEMAND EQUATION

Estimated Demand Equation

Student’s Name

Professor’s Name

Course Title

Date

1

ESTIMATED DEMAND EQUATION

2

Option 1

Elasticities for each independent variable

Option 1

QD = - 5200 - 42P + 20PX + 5.2I + 0.20A + 0.25M

P= 500, PX= 600, A= 10,000, I= 5,500, M= 5,000

Replacing the values in the above equation;

QD = - 5200 – 42(500) + 20(600) + 5.2(5,500) + 0.20(10,000) + 0.25 (5,000)

QD= 17,650

Price elasticity (Ep) is calculated by; (P/Q) (∆Q/∆P)

Ep= (P/Q) (∆Q/∆P)

(∆Q/∆P)= -42, from the regression equation

Ep= (500/17,650) (-42) = -1.19

Cross-price elasticity= 20(600/17,650) = 0.68

Elasticity of Microwaves in the market= (0.25) (5000/17650) = 0.07

Income elasticity= (5.2) (5500/17650) = 1.62

Advertisement elasticity= (0.2) (10,000/17650) = 0.11

ESTIMATED DEMAND EQUATION

3

Implications for the elasticities for the business in terms of short-term and long-term

pricing strategies

The price elasticity -1.19. Price elasticity an indication of price sensitivity. A price

elasticity of -1.19 shows that a one percent rise in the price of particular goods results in a

decrease of the quantity of demanded of the same goods by 1.19%. Therefore, the demand for

the goods is relatively elastic since relative changes in prices lead to a change in the quantity of

goods dema...

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