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Demand Estimation

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Demand Estimation
Sierra McDaniel
ECO 550: Managerial Economics
Dr. Moses Pologne
7/24/2014

Option 1: QD=-5200-42P+20PX+5.2I+.20A+.25M In economics, “a variable is an event, idea, value, or some other object or category that a researcher or business can measure” (Basu, 2014, para. 1). There are two types of variables: dependent and independent. Dependent variables are swayed by other factors, but independent variables stand alone and aren’t affected by other variables (Basu, 2014). For this equation there are five independent variables: price (P), competitors price (PX), income (I), advertising expenditures (A), and the number of microwaves sold (M). In order to calculate the given variables to get the quantity demanded the prices must be plugged into the equation:
QD = Quantity of demand of 3-pack units
P (in cents) = Price of the product = 500 cents per 3-pack unit
PX (in cents) = Price of leading competitor’s product = 600 cents per 3-pack unit
I (in dollars) = Per capita income of the standard metropolitan statistical area (SMSA) in which the supermarket are located = $5,500
A (in dollars) = Monthly advertising expenditures = $10,000
M = Number of microwaves ovens sold in the SMSA in which the supermarkets are located =5,000

QD=-5200-42500+20600+5.25,500+.2010,000+.255000 = $17,650 1. Compute the elasticity for each independent variable.
According to McGuigan, Moyer, and Harris (2014), quantity demanded is most commonly used to discover the elasticity of the variables. Elasticity of demand is defined as the amount that QD changes when the price changes (NetMBA, 2010). It is actually described as “the ratio of the percentage of change in QD to the percentage of change in price, assuming that all other factors influencing demand remain the unchanged” (McGuigan, Moyer, & Harris, 2014, p. 73). The elasticity of each variable is

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