Econ 550

Assignment 1: Demand Estimation

Alphonser Murphy

Professor: Basil N Ibegbulam

ECO550 Managerial Economics & Globalization

1. Compute the elasticities for each independent variable.

When P = 500, C = 600, I = 5500, A = 10000 and M = 5000, using regression equation

42*P/Q = 42* 500/Q

Qd = -5200 – 42 *500 + 20 * 600 + 5.2 * 5500 + .20 * 10000 + .25 * 5000 = 17650

Price Elasticity Ep – (P/Q) * (-42) = (-42) * (500 / 17650) = -1.19

Ec = 20 * 600 / 17650 = 0.68

Ei = 5.2 * 5500 / 17650 = 1.62

Ea = 0.20 * 10000 / 17650 = 0.11

Em = 0.25 * 5000 / 17650 = 0.07

2. Determine the implications for each of the computed elasticities for the business in terms of short-term and long-term pricing strategies. Provide a rationale in which you cite your results.

The price elasticity is -1.19; this means a 1% increase in price of the product causes quantity demanded to drop by 1.19%. The demand is somewhat elastic. Therefore, increase in price may drive customers away.

Cross-price elasticity is 0.68 which means if price of competitor product increases by 1%, then quantity demanded of this product increases by 0.68%. The product inelastic to competitor’s price and the firm shouldn’t worry about the competitor as their pricing won’t have any major effect on its own sales.

Income-elasticity is 1.62 which means 1% rise in average income in the area boosts quantity demanded by 1.62%. The product is elastic and the firm can choose to increase the price average income rises.

The advertisement elasticity is 0.11 which means a 1% increase in advertising expenses increases quantity demanded only by 0.11%. The demand for advertising is inelastic. This means even if the advertisement increases the prices should not because it can cause customers to not want the product.

Elasticity to microwave ovens in the area is 0.07, which displays a 1% rise in the number of ovens in the area increases quantity demanded by only 0.07%. Demand is inelastic.

3. Recommend whether...