1. Compute the elasticities for each
independent variable. Note: Write down all of your calculations.
QD = – 5200 – 42(500) +
20(600) + 5.20(5500) + 0.25(5000) + 0.20(10000)
= -5200 – 21000 +12000 + 28600 + 1250 +
Elasticity = (P/Q) (?Q/?P)
is given in the regression equation = –
Ep = = – 0.119
elasticity for Leading competitor Product (Epx)
Epx = = 0.6834
for Income per Capita
Ey = = 1.6200
Ea = = 0.1100
in number of microwaves sold
= = 0.0700
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.
was computed as -1.19 in this case.
This implies that a one percent increase in commodity prices causes the quantity
demanded to reduce by 1.19 % provided that all other factors are
kept constant. Hence, the product demand in this case
portrays some degree of elasticity.
In the case of
price elasticity of competitor products, the computation gives 0.6834.
Its interpretation is that provided all other factors are kept constant, a one
percent increase in the competitor’s price results to a 0.6834%
increase in the quantity demanded of the low-calorie frozen microwavable foods.
This is also a fairly inelastic relationship between the quantity demanded of
the microwavable food and the competitor’s price of a similar product.
in Income per capita was computed as
thereby explains that while holding all other variables certeris peribus, a one
percent increase in average area income would lead to an increase in quantity
demanded of microwavable food by 1.62%.
This explicitly shows elasticity and the firm can increase the price of the
microwavable foods with increase income per capita and still retain consumers
in the long run
The outcome for
advertisement elasticity is 0.11. This result suggests that an increment in
advertising expenses by one percent is likely to lead to a 0.11% increase in
the quantity demanded of the low-calorie frozen microwavable foods certeris
peribus. This as such implies that advertising poses an inelastic relationship
with demand. An increase in advertising does not necessarily warrant for a
spontaneous and direct relationship with the increase in price. However, if the
firm should spend even more on advertising, the cost of advertising shouldn’t
trickle down to the consumer as it would drive away the product consumers in
the long term.
the case of the sales of microwave ovens region, elasticity was computed as
0.07. The result explicitly implies that a one percent increase in the number
of ovens leads to a 0.07% increase in quantity demanded for microwaves. The resultant
inference is that demand illustrates a perfectly inelastic relationship. In turn, the pricing strategy may not necessarily
focus on the number of ovens as a factor affecting quantity demand to a
3. Recommend whether you believe that this firm should or should not cut
its price to increase its market share. Provide support for your recommendation.
From the price elasticity outcome, we note that
price elasticity is less than 1, (–0.419). This explains a great confidence
that if the price of the food would be brought down, then it would directly
result to a decrease in quantity demanded. Hence, the relationship
may lead to increased market shares for the company. It points to the need for
the company to cut its price. However,
if price elasticity would be greater than one, I would recommend that price be
brought down as this would then result to an increase in quantity demanded and
a bigger market share in the long run. (Tragakes, 2009).
4. Assume that all the factors affecting demand in this model remain the
same, but that the price has changed. Further assume that the price changes are
100, 200, 300, 400, 500, 600 cents.
that corresponding changes in price are stated as 100, 200, 300, 400, 500 and
600, and that Q = -7909.89 = 79.1P, price substitution in the equation (Q =
-7909.89 = 79.1P) gives:
PS 100 QS = -7909.79 + 79.1 (100)
……… QS = -7909.79 + 7910 = 0.21
PS 200 QS = -7909.79 + 79.1 (200)
……… QS = -7909.79 + 15820 = 7909.99
PS 300 QS = -7909.79 + 79.1 (300)
……… QS = -7909.79 + 23730 = 15820.21
PS 400 QS = -7909.79 + 79.1 (400)
……… QS = -7909.79 + 31640 = 23730.21
PS 500 QS = -7909.79 + 79.1 (500)
……… QS = -7909.79 + 39550 = 31640.21
PS 600 QS = -7909.79 + 79.1 (600)
……… QS = -7909.79 + 47460 = 39550.21
Determine the equilibrium price and quantity.
demand equation keeping all other factors certeris peribus shall be represented
Q = -5200 –
42(P) + 5.20(5500) + 20(600) +0.2500(5000) + 0.20(10,000)
Q = 38,650 – 42P
= 38,650 – Q Hence P = –
P = – 5200/45 +
Q/45, as Q = 5200 =45P
solution of the supply and demand curves gives,
5200 + 45P =
38,650 – 42P
Thus, 87P =
P = 384.48 while
Q = 5200 + 45(384.48)
Q = 22,501.60
demanded shall therefore be 22,501.60 when price is at equilibrium. Note that
the equilibrium price is where demand and supply curves intersect.
the significant factors that could cause changes in supply and demand for the
low calorie, frozen microwavable food. Determine the primary manner in which both
the short-term and the long-term changes in market conditions could impact the
demand for, and the supply, of the product.
equilibrium quantity rates are at 22, 501 units while the equilibrium price
rate is at 384 cents. Also, the equilibrium quantity and price run at a point
where the demand and supply intercept. Therefore, from the demand equation, changes
in the demand for the product would lead to changes in the income of consumers.
Also, practices such as pricing correlated goods and price operations in
competitor products may account for changes in demand.
factor that may necessitate changing in demand entails the taste and preference
of the consumers. Changes in production and technological advancements, the
numbers of product suppliers and raw material and labor availability may also
lead to the change in product supply.
Indicate the crucial factors that could cause rightward shifts and leftward
shifts of the demand and supply curves for the low-calorie, frozen microwavable
the demand equation, changes in the demand for the product leads changes in the
income of consumers. Also, practices such as pricing correlated goods and price
operations in competitor products may account for changes in demand.
A rightward shift in demand curve would
result from an increase in people’s income (Tragakes, 2009). An increase in income results in
higher purchasing power of consumers therefore increasing the demand for the
low-calorie microwavable food (Mendoza, 2013).
The direct relationship between quality
and quantity demanded. If a consumer derives satisfaction from a commodity and
would have preference over a commodity or with regard to the type of market,
then demand for quality goods would increase, making the demand curve shift to
The speculation of certain commodities
may increase the demand of certain commodities as consumers may be overseeing a
period of scarcity of the product. This would make a good’s demand shift to the
right but only in a short run. (Samaras1, 2014.)
Mendoza, M. (2013). The Demand Driven and the.
Antonoma : Univasidad Nacional Autonoma de Mexico.
(2014.). Learn Economics by Going to the Movies. Journal of Education and
Human Development, 463-465.
(2009). Economics for the IB Diploma. Cambridge: Cambridge University