925 Words4 Pages

Demand Estimation
Dhruvang kansara
Eco 550, Assignment 1
Professor: Dr, Guerman Kornilov
January 27, 2014
1. Compute the elasticity for each independent variable. Note: Write down all of your calculations.
According to our Textbooks and given information, When P = 8000, A = 64, PX = 9000, I = 5000, we can use regression equation,
QD = 20000 - 10*8000 + 1500*64 + 5*9000 + 10*5000 = 131,000
Price elasticity = (P/Q)*(dQ/dP)
From regression equation, dQ/dP = -10.
So, price elasticity EP= (P/Q) * (-10) = (-10) * (8000 / 131000) = -0.61
Similarly,
EA = 1500 * 64 / 131000 = 0.73
EPX = 5 * 9000 / 131000 = 0.34
EI = 10* 5000 / 131000 = 0.38
2. Determine the implications for each of the*…show more content…*

Therefore, quantity demanded is relatively inelastic to all factors considered. So, company shouldn’t worry much about these factors. 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. A price cut would increase quantity demanded, as the price elasticity is negative. But, magnitude of elasticity is a less than unity. Revenue is maximized when the magnitude of elasticity is one. Therefore, a price-cut will increase quantity demanded but will lead to a loss of sales. So, price-cut should be made only if firm is trying to strengthen its consumer base; from profit perspective, it should instead raise the price. 4. Assume that all the factors affecting demand in this model remain the same, but that the price has changed. Further assume that the price changes are 100, 200, 300, 400, 500, 600 cents. 1. Plot the demand curve for the firm. Deriving the formula from textbook we can keep other factors constant, demand equation is Q = 20000 - 10*8000 + 1500*64 + 5*9000 + 10*5000 Q = 211000 - 10P P = 21100 - 0.1Q (plotted below) 2. Plot the corresponding supply curve on the same graph using the supply function Q = 5200 + 45P with the same prices. Q = 5200 + 45P P = -5200/45 + Q/45 3. Determine the equilibrium price and quantity. According article and explanation of formula, solving demand and supply equation simultaneously, 211000 - 10P = 5200 + 45P

Therefore, quantity demanded is relatively inelastic to all factors considered. So, company shouldn’t worry much about these factors. 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. A price cut would increase quantity demanded, as the price elasticity is negative. But, magnitude of elasticity is a less than unity. Revenue is maximized when the magnitude of elasticity is one. Therefore, a price-cut will increase quantity demanded but will lead to a loss of sales. So, price-cut should be made only if firm is trying to strengthen its consumer base; from profit perspective, it should instead raise the price. 4. Assume that all the factors affecting demand in this model remain the same, but that the price has changed. Further assume that the price changes are 100, 200, 300, 400, 500, 600 cents. 1. Plot the demand curve for the firm. Deriving the formula from textbook we can keep other factors constant, demand equation is Q = 20000 - 10*8000 + 1500*64 + 5*9000 + 10*5000 Q = 211000 - 10P P = 21100 - 0.1Q (plotted below) 2. Plot the corresponding supply curve on the same graph using the supply function Q = 5200 + 45P with the same prices. Q = 5200 + 45P P = -5200/45 + Q/45 3. Determine the equilibrium price and quantity. According article and explanation of formula, solving demand and supply equation simultaneously, 211000 - 10P = 5200 + 45P

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