1 through 5 are based on the following scenario (adapted from Chapter 5 demand e
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1 through 5 are based on the following scenario (adapted from Chapter 5 demand estimation question number 3, p.163) The marker of a leading brand of low-calorie microwavariable food estimated the following demand equation for its product using data from 26 supermarkets Q = 5,200 - 42p + 20px + 5.21 + 0.2A + 0.25M (2.002) (17.5) (6.2) (2.5) (0.09) (0.21) R^2 = 0.55 n = 26 F = 4.88 Assume the following values for the independent variables: Q = Quality sold per month P(in cents) = Price of the product = 500 P_x (in cents) = Price of leading competitor's product = 600 l(in dollars) = Per capital income of the standard metropolitan statistical area (SMSA) in which the supermarket is located = 5,500 A(in dollars) = Monthly advertising expenditure = 10, 000 M = Number of microwave ovens sold in the SMSA, in which the supermarket is located =,000 Calculate the quantity using the given values for the independent variables. Refer to question 1. Calculate the price elasticity of demand. A numeric example is demonstrated in the second paragraph n that page. Based on the price elasticity of demand, do you think that this firm should out its price to increase its market share? No, demand is inelastic so cutting price would reduce revenue. No, demand is elastic so cutting price would reduce revenue. Yes, demand is inelastic so cutting price would increase revenue. "Yes, demand is elastic so cutting price would increase revenue. Using the information in question 1, compute the income elasticity. Based on the price elasticity of income, do you think that this company would be extremely concerned about the impact of a recession on this sales? Yes, income elasticity is relatively high, so a recession (with lower income) would likely reduce sales. Yes, income elasticity is relatively low, so a recession (with lower income) would likely reduce sales. No, income elasticity is relatively high, so a recession would not have a large impact on sales. No, income elasticity is relatively low, so a recession would not have a large impact on sales. What proportion of the variation in sales is explained by the independent variables in question 1?Explanation / Answer
(1) & (2) - Your answers are correct.
(3)
Absolute value of price elasticity of demand is higher than 1, so demand is elastic. With elastic demand, a price cut will increase revenue.
(4) Income elasticity = (dQ / dI) x (I / Q)
= 5.2 x (5,500 / 17,650) = 1.62
(5) Since elasticity is higher than 1, an 1% decease in income will reduce sales by 1.62%. So, a recession will likely reduce sales.
(6) R2 = 0.55
So, 55% of variation in sales is explained by independent variables.
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