The maker of a leading brand of low calorie microwaveable food estimated the following demand equation for its product using data from 26 supermarkets around the country for the month of April.
Q = ?5 200 ? 42P + 20P x +5.2Y + 0.20A + 0.25M
Assume the following information for the independent variables:
- Q = quantity sold per month.
- P (in cents) = Price of product = 500
- Px (in cents) = Price of leading competitor's product = 600
- Y (in rands) = Per capita income of the standard metropolitan area (SMSA) in which the supermarket is located = 5 500
- A (in rands) = Monthly advertising expenditure = 10 000.
- M = number of microwave ovens sold in the SMSA in which the supermarket is located = 5 000.
Required:
1. Calculate the point elasticity for price (P), price of leading competitor (Px) and income (Y).
2. Do you think the company should be concerned about the impact of a recession on its sales? Explain.
3. Do you think the firm should cut its price to increase its market share? Provide reasons for your answer.