Demand Estimation – Brand New Assignment 2015

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.

Estimated Demand Equationè      Q_D=  – 5200 – 42(P) + 20(Px)+ 0.52( I )+ 0.20(A) + 0.25(M)

     Standard Errors of Estimate è               (2.002)  (17.5)    (6.2)       (2.5)        (0.09)      (0.21)
        (for calculating “t-values”

                      Other Regression statistics       n = 26     R² = 0.55      F = 4.88

Note: In the above regression equation, Q_D is the “dependent variable” and the variables on the right hand side of the equation all are “independent variables.  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.

Your supervisor has asked you to compute the elasticities for each independent variable in the above demand equation. Assume the following values for the independent variables:

Q_D       =          Quantity demanded of 3-pack units for your company’s frozen food

P (in dollars)     =          Price of the product = $5 per 3-pack unit

Px (in dollars)    =          Price of leading competitor’s product = $6 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 each

                                    Supermarket is located = 5,000

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

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

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.

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.

4.     Assume that all the factors affecting demand in this model remain the same, except that the price of your company can change.

a)     Plot the demand curve for your firm by using the following prices for its 3-pack unit: $2, $4. $6, $8, and $10. Hint: Place the price (P) on vertical axis and the quantity demanded (Q_D) on the horizontal axis.

b)    Plot the corresponding supply curve on the same graph using the following supply function
Q_S = -79.1 + 79.1(P) with the same prices as in part a. (Remember: Price is placed on the vertical
axis and the quantity on the horizontal axis.)

c)     Determine the equilibrium price and quantity.

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.

1. Indicate the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves.
2. 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.