Demand

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

For a refresher on independent and dependent variables, please go to Sophia's Website and review the Independent and Dependent.

Option 1

Note: The following is a regression equation. Standard errors are in parentheses for the demand for widgets.

QD = - 5200 - 42P + 20PX + 5.2I + 0.20A + 0.25M

(2.002) (17.5) (6.2) (2.5) (0.09) (0.21)

R2 = 0.55 n = 26 F = 4.88

Your supervisor has asked you to compute the elasticities for each independent variable. Assume the following values for the independent variables:

Q = Quantity demanded of 3-pack units

P (in cents) = Price of the product = 500 cents per 3-pack unit

PX (in cents) = Price of leading competitor's product = 600 cents per 3-pack unit

I (in dollars) = Per capita income of the standard metropolitan statistical area

(SMSA) in which the supermarkets are located = $5,500

A (in dollars) = Monthly advertising expenditures = $10,000

M = Number of microwave ovens sold in the SMSA in which the

supermarkets are located = 5,000

Additional info for assignment:

Hints for Assignment 1

Please review the following files posted in Week 2 Instructor Insights.

Demand Estimation - Sample Analytical Problem

• It shows how elasticities are calculated for the independent variables in the regression equation.
• It also shows how you can interpret the elasticities.

Graphing Supply and Demand Instructions and Graphing Supply and Demand Sample Problem
These files will show you how to graph in Excel.

Under Instructor Insights, you can find additional material on demand estimation and using Excel.

IMPORTANT!!! You should use Option 1. Ignore Option 2.

Question 1: You should compute the elasticity for each independent variable as shown in the sample analytical problem mentioned above.

Note: Do not convert the cents into dollars.

Question 2: Interpret the elasticities as shown in the sample analytical problem.

Question 3: You should look at the price elasticity of demand to answer this question. If the absolute value of elasticity is smaller than 1, the demand is inelastic, and the company would lose revenue if it cuts its price. If the absolute value of elasticity is bigger than 1, then the demand is price elastic and the company would increase its market share and its revenue if it cuts the price.

Question 4: The supply function is given to you. It is Q = -7909.89 + 79.0989P. You have to calculate the demand function. The regression equation is the demand function, but you have to keep all factors that affect the demand constant, except for the price. So, you can plug in the provided values of Px, I, A, and M in the regression equation. Thus, you will derive the demand function, which shows the relationship between quantity demanded and price assuming that nothing else changes.

Here is and example based on the demand equation in the sample analytical problem.

QD = 15,000 - 10 P + 1500 A + 4 PX + 2 I

Q = Quantity demanded

P = Price = 7,000

A = Advertising expense, in thousands = 54

PX = Price of competitor's product = 8,000

I = Average monthly income = 4,000

QD = 15,000 - 10 P + 1500 (54) + 4 (8,000) + 2 (4,000)

QD = 15,000 - 10 P + 81,000 + 32,000+ 8,000

QD = 136,000 - 10 P (this is the demand function)

Follow the graphing instructions to plot the demand curve.

Enter in one column the prices 100, 200,...,600

• Calculate the quantity demanded at each price using the demand function in a second column.
• Then, graph the demand curve using the graphing instructions.
• Use the supply function and follow the instructions to graph it.
  The equilibrium point would be the point of intersection between demand and supply curves. The equilibrium price corresponding to this point is on the vertical axis, and the equilibrium quantity corresponding to this equilibrium point is on the horizontal axis.
  To answer this question, review the demand and supply factors.

Question 5: Consider the most important factors other than the price of the product that can affect the demand and supply of low-calorie microwavable food. You can do some research on the demand and supply conditions in this market.