Elasticity's of Demand

Elasticity’s of Demand

Jamie Lindsay

Strayer University

ECO550

Godfrey Ejimakor

04/27/2016

Elasticity’s of Demand

1. Compute the elasticities for each independent variable. Note: Write down all your calculations.

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

QD = 17650

EP = -42 * 500 / 17650 = -1.19

EPX = 200 * 600 / 17650 = 0.68

EI = 5.2 * 5500 / 17650 = 1.62

EA = .20 * 10000 / 17650 = .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 rational in which you cite your results.

With a price elasticity of -1.19 a 1% increase in price would cause quantity demanded to drop by 1.19%. This indicates that the demand for this product is somewhat elastic.

Cross price elasticity is 0.68 and if competitor’s price rise by 1% then quantity demanded for our products will increase by 0.68%. Competitor pricing shouldn’t affect sales since our products are fairly inelastic in comparison.

Income elasticity is 1.62 and if average income in the area rise by 1% quantity demanded for our product will rise by 1.62%. If average income was to rise the company could raise the price since the product is elastic.

Advertisement elasticity is 0.11 and indicates that a 1% increase in advertising expenditures will increase the quantity demanded by0.11%. Demand for this product is inelastic as it relates to advertising.

The elasticity of the number of microwave ovens in the area is equal to 0.07. This indicates that a increase of 1% in the number of ovens will increase by 0.07%.

The calculations indicate that quantity demanded will be affected by the income of the people and price of the product. Furthermore, our product will not be adversely by increases in our competitor’s price.

3. Recommend whether you believe that this firm should or should not cut its price to increase its market share. Provide...