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Econ 550 Demand Estimation

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Demand Estimation

Managerial Economics & Globalization – ECO 550

Dr. Lundondo Mumeka
July 17, 2014

Introduction
This assignment is trying to compute the elasticities for each independent variable in a giving regression equation for the demand of a leading brand of low-calorie microwavable food across 26 superstores for the month of April. The linear equation provided is QD = -5200 – 42P + 20 PX + 5.2I + .20A + .25M which suggests that it is dependent on the following variables: * P - Price of the product * PX – Price of the leading competitor’s product. * I – Per capita income of the standard metropolitan statistical area in which the superstores are located. * A – Monthly advertising costs. * M – No. of microwaves sold in the metropolitan areas being considered.
Then determining the implications for each of the computed elasticities for the business in terms of short-term and long-term pricing strategies of the product. And also create the supply and demand curves at different prices to determine the equilibrium price and quantity. Finally, evaluate factors that could impact the rightward / leftward shifts of the demand and supply curves.
Computing the elasticities for each independent variable.
The following data was provided by the professor that needs to be plugged into the Demand equation above to determine the Quantity demanded (QD):
PX = 600 I = 5,500 A = 10,000 M = 5,000
QD = -5200 – 42P + 20 PX + 5.2I + .20A + .25M
QD = -5200 – 42 (500) + 20(600) + 5.2 (5500) + 0.2 (10000) + 0.25(5000)
QD = -5200 – 21000 + 12000 + 28600 + 2000 + 1250
QD = 17650
Quantity demanded (QD) = 17650
Calculation of elasticity for each variable:
PEDP = - 42P / QD = - 42 (500) / 17650 = - 1.19
The other elasticities could be calculated similarly.
PEDPX = 20 (PX) / QD = 20(600) / 17650 = 0.68
PEDI = 5.2 (I) / QD = 5.2(5500) /...

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