Assignment + 0.20A + 0.25M (2.002) (17.5) (6.2)

 
 
 
 
 
 
 
 
 
Assignment
1
 Demand Estimation
 
 
 
 
 
 
 
 
 
 
 
 
Dawn
Tate
Professor
Mohammed Sumadi
ECO
550 Managerial Economics and Globalization
Due:  January 22, 2018
 
 

Introduction

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

As
an employee of the creator of one the leading brand of frozen low-calorie microwavable
food.  In this publication I will
estimate a demand equation for product in our production using the data from 26
supermarkets from around the country.  I
will use the following regression equation with standard errors in parenthesis
for the demand for widgets:    QD= -5200 – 42P + 20PX + 5.2I + 0.20A +
0.25M

(2.002)            (17.5) (6.2)    (2.5)  
(0.09)   (0.21)

R2 = 0.55        n = 26              F = 4.88

 

Under the instruction
of my supervisor the computation of the elasticities of each independent
variable using the following values of the independent variables below are as
follows:

Q Demand equals – 5200
minus 42P plus 20PX plus 5.2I plus .20A plus .25M

P = .500 cents per 3 pack unit

PX = .600 cents per 3 pack unit – competitor’s product

I = $5500 average supermarket income

A = $10,000 advertising expenses

M = 5000 microwavable ovens sold

 

Finding
Q based on the values given: P, PX, I, A, and M.

QD= – 5200 – 42P + 20PX + 5.2I + .20A + .25M

QD = -5200 – 42*500 + 20*600 + 5.2*5500 + 0.2*10000
+ 0.25*5000 = 17,650

QD
= 17,650

 

 

 

Price
elasticity of Demand:  = (DQ / DP) *(P/Q)  

Regression equation (DQ / DP) = -42

EP = (-42) * (P/Q) = (500 / 17650) = -1.19

 

Advertisement
Elasticity (EA) of demand = (DQ / DA)*(A/Q)

EA = (10.000 / 17,650) * 0.20 = 0.11

Cross
Price Elasticity of Demand = (DQ/DPX)
* (PX/Q)

Cross price Elasticity EPX = 20 * (600 /
17650) = 0.68

Income
Elasticity of Demand: –
(DQ /DI)*(I/Q)

Income Elasticity EI = (5500 / 17650) *
5.2 = 1.62

Microwave
Oven Elasticity of Demand: – (DQ
/DI)*(I/Q)

Microwave oven Elasticity EM = 0.25 * (5000
/ 17650) = 0.07

 

Implications
of each computed elasticities

When
the elasticity price is calculated the measurement associated to the
relationship is computed with a change quantity demand for the microwave oven versus
the change derived within the price. 
This prediction is based on theory that each factor that has the ability
to change will not affect demand.  The
computation of the price elasticity of demand is (1.19), indicates an increase
in price for every 1% increase price. 
With this information it can cause the average consumer spending/demand
for microwave ovens to decrease in the short-term which will result in less
food purchased in the consumer’s household. 
So, in the long-term revenue will cause total sales to be reduced.

However,
the calculation of the cross price elasticity of demand of (.068) shows if
there is an increase in the competitors’ microwavable food price by 1%, then
the demand of our company’s microwavable food will increase by .68%.  This relationship between goods and services
indicates the association of the quality demand and the goods when there is a
change.

According
to McGuigan the calculated income for elasticity of demand is 1.62%.  If it is assumed that the all the other
factors that affect demand remains unchanged then the percentage ration in
quantity demand will be related to the percentage change in revenue  (McGuigan, 2013). This translates to the
merchandise is of high quality and the aptitude of the elasticity will respond
to income as it alternates.  This also
requires managers to be more cognizant in events that produces downturns in the
long-run, mangers should make the appropriate adjustments, because during this
time the consumers’ disposable income will decrease. 

Because
the relationship to advertising is calculated at 0.11, which is smaller than 1,
the company’s sales level may not have any influence in advertising.  This translates to the demand is not elastic
to advertisement.  

Elasticity
of demand for microwavable ovens is calculated as 0.07.  This calculation indicates that if there is a
one percent increase in microwave ovens, other appliances will increase by .07%.  This information indicates that the sale of
microwave ovens demand is inelastic.  By
using this application the demand for microwavable food will have an increase
in the quantity of sales because the coefficient of the elasticity is
calculated at 0.07.

 

Determine whether company should
cut price

If
the absolute value of the price elasticity is greater than any price level
reduction, the price level will increase quantity demand.  Because an upsurge in quantity demand will
also increase total sales and profit, which would effectively increase earnings
per share which should result in a price cut (Aksoy, 2016).

 

Determine
a Demand Curve

                       

                                   

 

QD = -5200 – 42*P + 20*600 + 5.2*5500 + 0.2*10000 +
0.25*5000

QD = 38,650 – 42P

So, different prices are substituted in the above
equations. Then the price of 100 demands will be calculated as:

QD = 38,650 – 42(100) =
34,450

But if price is 200;

            QD
= 38,650 – 42(200) = 30,250

If price is 300;

            QD
= 38,650 – 42(300) = 26,050

If price is 400;

            QD
= 38,650 – 42(400) = 21,850

If price is 500;

            QD
= 38,650 – 42(500) = 17,650

If price is 600;

            QD
= 38,650 – 42(600) = 13,450

 

Plotting
the corresponding demand supply curve using the MC/Supply function

QD
= -7909.89 + 79.0989P with the same prices are as follows:

 

Equilibrium
price and quantity determinant.

The demand and supply equations are written as
follow:

38650-42P = -7909.89 + 79.0989P

38650+7909.89 = (79.0989+42) P

Hence, 121.0989P= 46,559.89

Therefore, P = 384.4782

Putting P in either of the equations gives QD=
22744.6924

The equilibrium price is 378.70 cents and the
equilibrium quantity is 22,745 units.

 

Influences
that will change the demand and supply of low-calorie frozen food:

It
is known in the demand equation that the demand for the merchandise will react
to the changes in the consumer’s income. 
Also, the merchandise preference and the pricing of the microwave oven
versus the pricing of the competitor will also affect the demand equation.  However, the disturbances in the
manufacturing cost that attribute to the raw material, labor for and innovation
of technology are attributing factors to the demand equation  (Krystallis,  2011).

Rightward
and leftward shift in the demand and supply curves:

The
demand and supply curve is related to how the curve swings to the left and
right.  This relates to the price change
of the consumer’s income.  Consumers will
have a higher desire for low-calorie foods when the price is less expensive,
this in comparison to food items that are prepared in stoves, oven,
microwavable, air fryers, etc.  This will
cause the curve to swing rightward.  But,
if the pricing of the substitute products decrease then the swing will go
leftward.  Other critical components that
affect the curve swing going leftward or rightward are the innovation of
technology, such as amount of time spent on processing the food.  Another component would be the how the
production of the product changes, and example would be updating software or
recall of parts.