Demand Estimation
Demand Estimation
Seydou Diallo
Strayer University
ECO 550: Managerial Economics
Dr. Fereidoon Shahrokh
November 4, 2014
Background
I work for Snack-Eeze. We are the leading brand of low-calorie, frozen microwavable food. We estimate the following demand equation for our product using the data from 26 supermarkets around the country for the month of April.
QD = -2,000 - 100P + 15A + 25PX + 10I
(5,234) (2.29) (525) (1.75) (1.5)
R2 = 0.85 n = 120 F = 35.25
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 = 200 cents per 3-pack unit
PX (in cents) = Price of leading competitor’s product = 300 cents per 3-pack unit
I (in dollars) = Per capita income of the standard metropolitan statistical area
(SMSA) in which the supermarkets are located = $5,000
A (in dollars) = Monthly advertising expenditures = $640
Compute the elasticities for each independent variable. Note: Write down all of your calculations.
McGuigan, Moyer, and Harris state that elasticity is merely a ratio of the percentage change in quantity to the percentage change in a determinant (2013). Therefore, we will use the following formula.
The formula for finding price elasticity of demand is
-2,000 - 100*200 + 15*640 + 25*300 + 10*5000
-2000 -20000 + 9600 + 7500 + 50000
(5,234) (2.29*200) (525*640) (1.75*300) (1.5*5000)
(5,234) (458) (336000) (525) (7500)
P = 200
PX = 300
I = $5,000
A = $640
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.
Short term pricing strategies would be crucial in determining the elasticity or inelasticity of demand. In 2008,
Seydou Diallo
Strayer University
ECO 550: Managerial Economics
Dr. Fereidoon Shahrokh
November 4, 2014
Background
I work for Snack-Eeze. We are the leading brand of low-calorie, frozen microwavable food. We estimate the following demand equation for our product using the data from 26 supermarkets around the country for the month of April.
QD = -2,000 - 100P + 15A + 25PX + 10I
(5,234) (2.29) (525) (1.75) (1.5)
R2 = 0.85 n = 120 F = 35.25
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 = 200 cents per 3-pack unit
PX (in cents) = Price of leading competitor’s product = 300 cents per 3-pack unit
I (in dollars) = Per capita income of the standard metropolitan statistical area
(SMSA) in which the supermarkets are located = $5,000
A (in dollars) = Monthly advertising expenditures = $640
Compute the elasticities for each independent variable. Note: Write down all of your calculations.
McGuigan, Moyer, and Harris state that elasticity is merely a ratio of the percentage change in quantity to the percentage change in a determinant (2013). Therefore, we will use the following formula.
The formula for finding price elasticity of demand is
-2,000 - 100*200 + 15*640 + 25*300 + 10*5000
-2000 -20000 + 9600 + 7500 + 50000
(5,234) (2.29*200) (525*640) (1.75*300) (1.5*5000)
(5,234) (458) (336000) (525) (7500)
P = 200
PX = 300
I = $5,000
A = $640
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.
Short term pricing strategies would be crucial in determining the elasticity or inelasticity of demand. In 2008,
References: Google. (n.d.). Demand Shifts Left. Retrieved November 3, 2014 from https://www.google.com/search?q=rightward+and+leftward+shifts+in+demand+curve&client=firefox-a&hs=uMr&rls=org.mozilla:en-US:official&channel=fflb&tbm=isch&imgil=Hi4P-50s3olTcM%253A%253BivZctxSItqN1aM%253Bhttps%25253A%25252F%25252Fcourses.byui.edu%25252Fecon_150%25252Fecon_150_old_site%25252Flesson_03.htm&source=iu&pf=m&fir=Hi4P-50s3olTcM%253A%252CivZctxSItqN1aM%252C_&usg=__AGLZWIv9kobvSsj3ol5OHR1P8Eg%3D&biw=1600&bih=763&ved=0CCsQyjc&ei=n-tbVO-sKJKjyAShk4LgDg#facrc=_&imgdii=_&imgrc=Hi4P-50s3olTcM%253A%3BivZctxSItqN1aM%3Bhttps%253A%252F%252Fcourses.byui.edu%252Fecon_150%252Fecon_150_old_site%252Fimages%252F3-3%252520Equilbrium_06.jpg%3Bhttps%253A%252F%252Fcourses.byui.edu%252Fecon_150%252Fecon_150_old_site%252Flesson_03.htm%3B720%3B540 McGuigan, J. R., Moyer, R. C., & Harris, F. H. deB. (2014). Managerial economics: applications,strategies and tactics (13th ed.). Stamford, CT: Cengage Learning. Pettinger, Tejvan. (2008, April 18). Price Elasticity of Demand – Short and Long Run. Retrieved November 3, 2014 from http://www.economicshelp.org/blog/435/concepts/price-elasticity-of-demand-short-and-long-run/ Sarokin, David. (2014). What Causes the Demand Curve to Shift to the Left? Retrieved November 30, 2014 from http://smallbusiness.chron.com/causes-demand-curve-shift- left-15857.html