Pool Vac Essay

1178 Words Feb 3rd, 2013 5 Pages
ECN510 – Mr. Santos

PoolVac, Inc. manufactures and sells a single product called the “Sting Ray,” which is a patent-protected automatic cleaning device for swimming pools. PoolVac’s Sting Ray faces its closest competitor, Howard Industries, also selling a competing pool cleaner. Using the 26 observations report we calculated pricing and cash flows.

The General Demand equation used is
QD = a + bP + cMavg + dPh
Where a is the dependent variable, bP is the price of the PoolVac good, cMavg is the average household income, and the dPh is the price of the related good (Howard Industries). . An estimated demand equation for PoolVac is:
Qd = 2729 – 10.8P + 0.0214Mavg + 3.17Ph
Where, bP is the price of the PoolVac good, cMavg is the
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The price elasticity is less than 1, which makes the price change inelastic. From the equation, with the product being inelastic we can assume the price is not a great factor to the customers of the Sting Ray vs. Howard’s product given other determining factors.

Income elasticity C(m/Q)
Em= 0.0214(5000/1650)
Em= 0.0214(3.03)
Em= 0.065

Income elasticity shows the change in income to the purchase of the Sting ray. At 0.065 the good is a normal good and income is not affected much when purchasing this product.

Cross Price elasticity D(Pr/Q)
Exr= 3.17( 240/1650)
Exr= 3.17(0.145)
Exr=0.46

Cross Price elasticity measures the responsiveness of quantity demanded of one good to changes in the price of a related good. The amount of the cross price shows that the 2 products are substitutes of each other and shows that the customers of Howard Industry are not really affected if there is a change in price of one product to the next.

Looking at the above equations with changes in price demand, income and cross price. I would recommend the managers of Sting Ray to lower the price slightly to continue to be in competition with Howard products but this will also let Sting Ray’s product stay inelastic where factors of income are not involved.

If the manager wanted to increase units sold by 5% in efforts to increase revenue the managers would b=have to lower the product’s current price by 2.6%.
Percentage change in price
-1.90=5%/%change P

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