An Assignment On Demand Estimation

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Assignment 1: Demand Estimation Brian McGee ECO550 Managerial Economics and Globalization Dr. Rolle Jan. 16, 2015 Compute the elasticities for each independent variable QD = -5200-(42*500)+(20*600)+(5.2*5500)+(0.2*10000)+(0.25*5000) QD = -5200 - 21000 + 12000 + 28600 + 2000 + 1250 QD = 17650 Price elasticity (EP)= EP = -1.19 (1.19) Formula: EP = -42*500/17650 Competitor price elasticity (EPX)= 0.68 Formula: EPX = 20*600/17650 Income elasticity (EI)= 1.62 Formula: EI = 5.2*5500/17650 Advertising elasticity (EA)= 0.11 Formula: EA = .20*10000/17650 Microwave ovens sold elasticity (EM)= 0.07 Formula: EM = .25*5000/17650 Determine the implications for each of the computed elasticities for the business in terms of short-term and long-term pricing strategies The price elasticity is 1.19 which is just barely greater than 1, so therefore price is considered slightly elastic. In the short term, reducing price can lead to increased demands. However from a long term perspective, this is not sustainable. Decreased prices over time will lead to decreased revenue for the company. Over time this will negatively impact the business when revenue falls below zero and becomes inelastic. The competitor price elasticity is 0.68 is less than 1, so it is considered inelastic. In the short term it is not wise to engage in a price war with competitors as competitor price has little impact on demand. If the company takes this stance, in the long term, demand will remain