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:
- 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 (A, PX and Y) remain the same.
- Plot the demand curve for the firm using these prices: 100, 200, 300, 400, 500, 600, 700, and 800 cents.
- 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.
- Determine the equilibrium price and quantity. (Show this graphically and/or calculate using algebra.)
- What short-term and long-term changes in market conditions could shift the demand and supply curves for this product?
- Use at least three (3) quality academic resources in this assignment.