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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.
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:
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.
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.
Expert Solution
ASSIGNMENT 1:
Demand Estimation: Frozen Microwavable Food
ECONOMICS 550
Demand Estimation: The Frozen Food Industry
Overview
This paper will present the demand estimation for a leading brand low-calorie frozen microwavable food. The data has been collected from 26 supermarkets around the country. The regression equation is utilize to estimate the company’s demand and supply. I will also determine the calculations for the elasticities for the independent variables. The managers of our company will consider the demand elasticity price with the non-price determinants of demand. They are the consumer income, the price of competitor, advertising, the substitute goods, and the number of microwaves ovens sold in the designated area (Schiller,1999). In addition, the managers will review the market equilibrium price that affects demand. This will provide the significant factors that affect the demand. In addition, this will allow the managers to determine the level of the market conditions that may impact the demand and supply of the business (Schiller,1999).
The demand function is utilized to calculate the demand analysis (Hague, 2003). This information provides an overview of the data to the marketing team in reference to demand. The demand law states if there is a decrease in price then there is an increase in the quantity demanded (Hague, 2003). The impact of a higher price on revenue is depended on the price of elasticity to the demand (Shiller 1999). Higher prices will predict higher revenue when the demand is inelastic (Schiller 1999). If the demand is elastic the lower the price will generate higher revenue (Gordon 2013). Once the price of elasticity for demand is determined, then we can predict the response of consumers to the changing prices (Gordon 2013). In addition, we can also predict the seller’s revenue results (Pettinger2013). The Demand elasticity is finalized by the calculation of the percentage of change in quantity divided by the percent of change in price ( Schiller 1999). The regression equation to compute the elasticities are listed :
The company would like to increase the revenue. The law of demand states that the higher the price of a product then the lower its demand (Hague 2005). The lower the price for a good the higher the demand (Hague, 2005). The analysis of demand elasticity will tell when or how much the demand can rise or decrease compared to the price fluctuations (Gordon, 2013). The company will need to know the reaction of our consumers to a change in price. The price elasticity is calculated using the percent change in price divided by the percent change in quantity (Pettinger,2012). The solution will provide the economist to review or analyze how elastic or inelastic the price of the product is compared to the percent of price change and the amount requested by the consumers (Hague, 2005). If the demand elasticity is less than 1 then it is considered to be inelastic (Schiller, 1999). If the demand elasticity is greater than 1 it is elastic (Schiller,1999). The consumers will respond to the change in price. The company’s price elasticity of 1.19 is elastic. The consumers will be sensitive to the percent change (Schiller 1999). The price elasticity of the competition is (0.68). This is inelastic because it is more expensive, and any increase in price will not affect the quantity demanded. The income has a demand elasticity of 1.62. This means it is elastic, this will affect the amount demanded. The demand elasticity for advertising is (0.11) and for the microwaves it is (0.07). Both are less than one and inelastic. This will have a small or no impact on the consumer demand for frozen microwavable meals. Listed are the values for the independent variables and whether their results are elastic or inelastic:
Ep = -42(P/Q) = -42(500/17650) = -1.19 result is elastic,
Epx = 20(Px/Q) = 20(600/17650) =0.68 result is inelastic
EY = 5.2(I/Q) = 5.2(5,500/17650) = 1.62 result is elastic
EA = .25(A/Q) = .20(10,000/17650) = 0.11 result is inelastic
EM = .25(M/Q) = .25(5000/17650) = 0.07 result is inelastic
Qd = -5200-42*(500) = 17,650 result is inelastic
Pricing Recommendations
As stated the price elasticity of demand is an absolute value of 1.19. This is elastic. I would recommend the company discounting the prices (Pettinger, 2012). The discount for the price would increase the quantity that is demanded. This would increase the total revenue for the company (Pettinger, 2012). The income elasticity is also elastic. This would also affect the amount demanded. The consumer reaction to price that is affected by income, will justify stable economic conditions for the company to decrease price (Pettinger, 2012). The consumers will expand on the demand due to the discounted prices.
The Demand Curve
The chart and the listed calculations represent the quantity demanded and the quantity supplied for frozen food. The factors impacting demand stay constant other than price.
Price
Qdemand
Qsupplied
100
34450
0
200
302050
7909.88
300
26050
15819.8
400
21850
23729.7
500
17650
31639.6
600
13450
39549.5
Equilibrium Price and Quantity
The interaction between supply and the demand will determine the market equilibrium price (Gordon, 2013). The market equilibrium price equals the quantity supplied ( Qs= 7908.89+79.0989P) and quantity demanded (Qd=38650-42P). The graph intersect at the value of P (384.48), which is the market equilibrium price. The most significant factor that causes a shift is due to the price and income. A 300-dollar decrease in price to 500 dollars then down to 200 dollars will cause an inelastic demand elasticity. This will also increase quantity that is supplied. This justifies the law of demand, which states a decrease in price means an increase in quantity demanded.(Schiller, 1999). When the consumer income decreases and the discounted price drops the consumers may consider a substitute or alternative goods..
Summary
Utilizing the demand equation can assist with a firm’s goals to increase revenue. This demand equation is efficient and consistence in calculations. Also the measure of forecasting this demand equation can be utilize with standard errors. The standard errors allows more certainty to the assumptions that are taken from the analysis for the demand elasticity. To maximize the company’s profits I recommend discounting prices and continue to serve low caloric microwavable food options to the consumers. The income elasticity will drive quantity demanded due to the lower price. This will justify the consumers’demand.
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References:
Schiller, Bradley, R. , (1999). The Essentials of Economics /Bradley R. Schiller-3rd ed..
Hague M. O. (2005) Income Elasticity and Economics Development: Methods and Applications: Dordrecht: Springer.
Gordon, B. R. Goldfarb, A., & Yang, L. (2013), Does Price Elasticity vary with Economic Growth? A Cross-Category Analysis. Journal of Marketing Research (JMR), 50(1) , 4-23.
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