Demand and Supply Estimation Essay

1208 Words May 9th, 2014 5 Pages
Heading: Demand and Supply Estimations

Assignment 1: Demand and Supply Estimation

Varney Momo Bafalie

Dr. Emmanuel Obi

Managerial Economics and Globalization

April 26, 2014

Managerial Economics: Applications, Strategies and Tactics, Mcguigan/Moyer/Harris 13th Edition, 2014

Imagine that you work for the maker of a leading brand of low-calorie, frozen microwavable food that estimates the following demand equation for their product using data from 26 supermarkets around the country for the month of April.
Option 1:

Note: The following is a regression equation. Standard errors are in parenthesis for the demand of widgets.
QD= - 5200 - 42P + 20Px + 5.2I + 0.20A + 0.25M (2.002) (17.5) (6.2) (2.5)
…show more content…
Provide a rationale in which you cite your results.

Price Elasticity is – 1.19. That is a 1% increase in price of the product will make quantity demanded to drop by 1.19%. Thus, the demand for this product is somewhat elastic. Consequently, increase in income may drive consumers away.

Cross- price elasticity is 0.68 that is if the price of the competitor’s product goes up by 1%, then quantity demanded of this product with increase by 0.68%. This product is fairly inelastic to a competitor’s price and there exists no need to be concerned about the competitor since their pricing won’t affect sales.

Income-elasticity is 1.62. This indicates that a 1% rise in the average area income will boost the quantity demanded by 1.62%. In this aspect, the product is elastic and the company can make the decision to raise the price if the average income rises.

Advertisement-elasticity is 0.11, which means that A 1% increase in advertising expense will raise the quantity demanded by 0.11%. Therefore, demand is rather inelastic to advertising. For that reason, more advertisement doesn’t automatically means a company can raise the price because that still could drive consumers away.

With respect to microwave ovens in the area, elasticity is 0.07, which shows an elevation of 1% in the number of ovens in the area increasing the quantity demanded by a mere 0.07%. Therefore, in this

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