# Demand Estimation

*label*Business Finance

*timer*Asked: Oct 17th, 2017

*account_balance_wallet*$30

### Question Description

**Assignment 1: Demand Estimation**

Due Week 3 and worth 200 points

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

**Option 2****Note:** The following is a regression equation. Standard errors are in parentheses for the demand for widgets.

QD = -2,000 - 100P + 15A + 25PX + 10I

(5,234) (2.29) (525) (1.75) (1.5)

R2 = 0.85 n = 120 F = 35.25

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 = 200 cents per 3-pack unit

PX (in cents) = Price of leading competitor’s product = 300 cents per 3-pack unit

I (in dollars) = Per capita income of the standard metropolitan statistical area

(SMSA) in which the supermarkets are located = $5,000

A (in dollars) = Monthly advertising expenditures = $640

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

- Computethe 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.
- Useat least three (3) quality academic resources in this assignment.
**Note:**Wikipedia does not qualify as an academic resource.

Option 3: THIS CALCULATION CARRIES AN EXTRA 15 POINTS.

### Forecasting Problem

The following are the sales achieved by Jensen Fabrics during the last 7 years.

- 116,000
- 124,000
- 127,000
- 146,000
- 155,000
- 154,000
- 162,000

Using the compound growth rate calculation, what would be your estimate for sales in 2000?

Your assignment must follow these formatting requirements:

- Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
- Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.

The specific course learning outcomes associated with this assignment are:

- Analyze how production and cost functions in the short run and long run affect the strategy of individual firms.
- Apply the concepts of supply and demand to determine the impact of changes in market conditions in the short run and long run, and the economic impact on a company’s operations.
- Use technology and information resources to research issues in managerial economics and globalization.
- Write clearly and concisely about managerial economics and globalization using proper writing mechanics.

## Tutor Answer

Attached.

Running Header: DEMAND ESTIMATION

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DEMAND ESTIMATION

Student’s Name

Professor’s Name

Course Title

Date

DEMAND ESTIMATION

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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

1. Compute the elasticities for each independent variable. Note: Write down all of your

calculations.

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

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

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

DEMAND ESTIMATION

3

QD= 17,650

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

Price elasticity (Ep) = (P/Q) (∆Q/∆P)

Ep= (P/Q) (∆Q/∆P)…… (∆Q/∆P)= -42

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

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

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.

The income elasticity of demand is 1.62. An income elasticity of 1.62 implies that a one

percent increase in the income of the consumers leads to an increase in the quantity of the

goods demanded. Therefore, the demand is elastic. An increase in the quantity of goods

demanded is thus more in comparison to the increase of the average income of the

consumers.

The price elasticity -1.19. Price elasticity an indication of price sensitivity. It shows the

sensitivity of the changes in the prices of goods to the quantity of goods demanded. A price

elasticity of -1.19 means that a one percent rise in the price of particular goods leads to a

decrease of the quantity of demanded of the same goods by 1.19%. When the prices of the goods

DEMAND ESTIMATION

are increased, it has a substantial effect on the quantity of goods demanded (McGuigan, Moyer

& Harris, 2013).

The cross-price elasticity is 0.68. It means that a one percent increase in the price of

competitor’s goods results to a 0.68 increase in the quantity of the goods demanded. Therefore,

when the competitors increase their prices, it is an advantage to the organization since its goods

will be demanded more.

The elasticity of Microwave ovens in the region market is 0.07. This means that a one

percent increase in the number of microwave ovens in the market results in an increase in the

quantity demanded by 0.07%. It is an example of inelastic demand where the change in the

quantity demanded will be less than the change in the prices of the microwaves in the region

market.

The advertisement elasticity is 0.11. An advertisement elasticity of 0.11 implies that a

one percent increase in the costs of advertising the good results in a 0.11% increase in the

quantity of goods demanded. Therefore, the demand is inelastic. There is no significant

relationship between the increase in the advertising expenses and the demand for the goods.

Even when the advertising campaigns are increased, the effect on the quantity of the goods

demanded is insignificant.

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.

The firm should cut its prices so as to increase its market share. Remember that the price

elasticity of demand is -1.19. This means that the demand is elastic. Therefore, a decrease in the

4

DEMAND ESTIMATION

5

prices of the goods results in a greater increase in the quantity of goods demanded, thus, this is

equivalent to an increase in the market share of the organization.

4. 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.

1. Plot the demand curve for the firm.

QD = - 5200 – 42(P) ...

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