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Words 2653

Pages 11

Option 1

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

QD = -5200 – 42(P) + 20 (PX) + 5.2 (I) + 0.20 (A) + 0.25 (M) =-5200 – 42*500 + 20*600 + 5.2*5500 + 0.20*10,000 + 0.25*5,000 = -5200-21000+12000+28,600+2000+1250 = 17650

Price Elasticity: -42*500/26,560 = -1.19

Cross Elasticity: 20*600/26,560 = 0.68

Income Elasticity: 5.2*5500/26,560 = 1.0768 = 1.62

Advertisement Elasticity: 0.2*10,000/26,560 = 0.11

Microwave Oven Elasticity: 0.25*5,000/26,560 = 0.07

Elasticity refers to the degree of changes in a demand or supply curve when prices changes. The elasticity shows the optimum price for the product to maximize a profit. If the price is set too high, it will turn customers away, causing less sales volume which will lead to less profit or even lead to loss. If the price is set too low, it may attract more customers, but total revenue could be low. Elasticity computation helps to determine the...

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