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Computing The Elasticities For The Independent Variables Essay

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1. Computing the elasticities for the independent variables Option 1 Solution QD = -5200 - 42P + 20PX + 5.2I + 0.20A + 0.25M Given that PX=600, P= 500, A=10,000, I=5,500 and M=5000, when we apply regression method we get: QD= -5200 – 42(500) + 20(600) + 5.20(5500) + 0.25(5000) + 0.20(10000) = 17,650 Price Elasticity = (P/Q) (∆Q/∆P) The Outcomes from the regression equation gives: ∆Q/∆P = -42. Hence, Price Elasticity (EP) = (P/Q) (-42) (500/17650) = -1.19 EC = 20(600/17560) = 0.68 EM = (P/Q) (0.25) (5000/17650) = 0.0700 EI = (P/Q) (5.20) (5500/17650) = 1.6200 EA= (P/Q) (0.20) (10000/17650) = 0.1100 Option 2 Solution QD = -2,000 - 100P + 15A + 25PX + 10I Given that PX=300, P= 200, A=5,000 and I=640, when we apply regression method we get: QD = -2,000 – 100(200) + 15(5,000) + 25(300) + 10(640) = 66,900 Price Elasticity = (P/Q) (∆Q/∆P) The Outcomes from the regression equation gives: ∆Q/∆P = -100. Hence, Price Elasticity (EP) = (P/Q) (-100) (200/66900) = -0.30 EC = 15(300/66900) = 0.067 EI = (P/Q) (10) (640/66900) = 0.096 EA= (P/Q) (15) (5000/66900) = 1.121 2. Implications for each of the computed elasticities for the business regarding short-term and long- term pricing strategies. Income elasticity (EI) computed as 1.62 and 0.096 for options 1 and 2 respectively demonstrates that a one percent expansion in normal region salary may prompt to an increment of amount requested; with the expansion in amount request anticipated to rate at 1.62% and 0.096% for option 1 and 2

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