The given equation is “QD =-2000 -100P +15A +25PX + 10I” By putting the values for variables, we calculate the quantity demanded QD = 2000-100(200 cents) +15($640) + 25 (300cents) +10 ($5,000) QD = 2000-100($200) +15($640) + 25 ($300) +10 ($5,000) = 9600+7500+50000-20000 2000=45100

Running head: ASSIGNMENT 1: DEMAND ESTIMATION 1

DEMAND ESTIMATION 8

Demand Estimation

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

OPTION # 2

The given equation is “QD =-2000 -100P +15A +25PX + 10I”

By putting the values for variables, we calculate the quantity demanded

QD = 2000-100(200 cents) +15($640) + 25 (300cents) +10 ($5,000)

QD = 2000-100($200) +15($640) + 25 ($300) +10 ($5,000) = 9600+7500+50000-20000

2000=45100

“Price elasticity”

Using regression equation ” ”

Price elasticity

Competitor’s Elasticity

Income Elasticity

Advertising Elasticity

  1. Determine the implications for each of the computed elasticity for the business regarding short-term and long-term pricing strategies. Provide a rationale in which you cite your results.

The price elasticity is negative, and it is less than one (1) which means the demand for the product is inelastic. The company can increase its prices to increase the revenues as one (1%) percent increase in the price will decrease the demand by only 0.443 percent which means the total revenue will still increase.

The elasticity of the demand for the competitor’s price is also inelastic as it is 0.1662 which means if the price of the competitor increases or decreases; it has no significant impact on the quantity demand for the company’s products. The company does not have to worry about the prices of the competitor’s prices in short run, but in the long run, this may change.

The advertising elasticity of the product demand is also low as it is 0.213 which means one percent increase in the advertising expenses will increase the demand for the product by 0.213. This tells that the increase in the advertisement will not automatically increase the demand for the product.

The income elasticity is the only one that is higher than one (1) which is 1.109 which means if the average income of the consumer is increased by one (1%) percent then the demand for the product will increase by 1.109% which means the demand is elastic. So the company should increase the prices when the average income of the consumer is increased.

The demand for the product is only elastic to the income of the consumer and it is almost insensitive to the price of the competitors and the advertising expenses. This means that the company should not worry about the prices of the competitors and should try to cut the costs of the advertising. However, the company should have a close eye on the income of the consumer.

The elasticity of income is 1.109. This is an indication that a one (1%) percent rise in the average income of the consumer will boost the demanded quality by 1.109. The product is elastic. The company can, therefore, decide to increase the price if the average income increases. (B. Curtis Eaton, Eaton, and Allen, 1988/2011) This implies that the demanded quality is highly sensitive to the income of the consumer and the product price. It is almost insensitive to the price of the competitor product and the advertising price.

  1. Recommend whether you believe that this firm should or should not cut its price to increase its market share. Provide support for your recommendation.

In short run, I will recommend the company not to cut the prices as the demand for the product is almost inelastic to price of the competitors and advertising and to price its product. The company can increase the price if needed to meet the increasing expenses or achieving the required revenue. However, in the long run, the company should have a close look at the average income of the consumer because the demand is elastic to income. So if in case the average income of the consumer is decreased then the price cut should be done and vice versa. (Colander, 1986/2017)

  1. Assume that all the factors affecting demand in this model remain the same, but that the price has changed. Further assume that the prices are 100, 200, 300, 400, 500, 600 cents.

a.) Plot the demand curve for the firm.

Assuming that all the other factors are constant, the equation is:

For 100

= =55100

For 200

= =45100

For 300

= = 35100

For 400

= =25100

For 500

= =15100

For 600

== 5100

600

5100

b.) Plot the corresponding supply curve on the same graph using the following supply function (with the same prices 100, 200, 300, 400, 500, and 600 cents):

Price

Quantity Q

Quantity S

For 100

55100

0

For 200

45100

7909.9

For 300

35100

15819.8

For 400

25100

23729.7

For 500

15100

31639.6

For 600

5100

39549.5

c

c.) Determine the equilibrium price and quantity. (Show this graphically and calculate using algebra.)

d.) Outline the significant factors that could cause changes in supply and demand for the product. 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.

The significant factors for the demand of the product are; the price, the average income of the consumers, costs of ingredients, tastes of the consumers. Speculations for the changes in the prices in future, political stability, government regulations and laws are the significant factors for the changes in the demand. (Adelman & Taft Morris, 1968) The company does not have to so concerned regarding these factors as they are not that associated with the demand for the product. Tthe income of the consumer is related to the demand for the products, and if the income of the consumers is increased, then the company can increase the prices of the product. (Ibrahim, G; Kedir, and Ledezma, 2007)

  1. What short-term and long-term changes in market conditions could shift the demand and supply curves for this product?

The shift in the demand and supply curve may be because of the changes in demand or supply or both. 48(Pindyck & Rubinfeld, 1988/2017) An increase will shift the curve to the right, and a decrease will shift the curve to left. A decrease in demand may come from a situation like the complementary product price increase decrease with the income of the consumer and some other factors. This increase can shift the demand and supply curve to left. An increase may happen when the income of the consumer is increased, or prices of the complementary products are decreased.

References

Adelman, I. and Taft Morris, C. (1968). Performance Criteria For Evaluating Economic Development Potential: an Operational Approach. Journal of Economics, 82(2), 260-280. doi: https://www.jstor.org/stable/1885897?seq=1#page_scan_tab_contents 27

Colander, D. C. (2017). Microeconomics (10th ed.). New York, N.Y., McGraw-Hill Education. (Original work published 1986) 6

B. Curtis Eaton, B. C., Eaton. D. F., and Allen, D. A. (2011). Microeconomics: Theory with Applications (8th ed.). North York, Ontario, Canada, Pearson Education Canada. (Original work published 1988) 6

Ibrahim, G; Kedir, A. M. and Ledemza, S. T. (2007, March). Household level Credit Constraint in Urban Ethiopia: A Discussion Paper number -03/07. Paper presented at University of Leicester, Department of Economics, Lancaster, U. K.

Pindyck, R. S., & Rubinfeld, D. L. (2017). Microeconomics (9th ed.). Upper Saddle River. N.J.: Pearson Education Limited. (Original work published 1988) 6

Reference:

price, quantity demanded curve
Quantity D 100 200 300 400 500 600 55100 45100 35100 25100 15100 5100

Price

Quantity demanded

Demand, supply curve
Quantity D 100 200 300 400 500 600 55100 45100 35100 25100 15100 5100 Quantity S 100 200 300 400 500 600 0 7909.89 15819.780000000002 23729.670000000002 31639.559999999921 39549.450000000012

price

quantity supplied and demanded

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