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Managerial Economic Globalization

In: Business and Management

Submitted By cwilder066
Words 1023
Pages 5
Crystal Wilder
Emmanuel Chebe
ECO :Managerial Economics and Globalization
January 23, 2016

I am working for the maker of a leading brand of low-calorie, frozen microwavable food that estimates the following demand equation for its product using data from 26 supermarkets around the country for the month of April. My supervisor has asked me to compute the elasticities for each independent variable.
QD = -2,000 - 100P + 15A + 25PX + 10I
(5,234) (2.29) (525) (1.75) (1.5)
R2 = 0.85 n = 120 F = 35.25
Compute the elasticities for each independent variables.
Price 1, Quantity 1
QD = QUANTITY DEMANDED
P1= Price of product (200 cents)
PX = Price of competitor’s product (300 cents)
I = per capita income ($5,000)
A = monthly advertising expenditures ($675)
QD= -2000 – (100*200) + (15*640) + (25*300) + 10(5000)
QD = -2000 – (20,000) + (9600) + (7500) + (50,000)
QD1 = $45,100
Price 2, Quantity 2 (price has increased by 1%)
QD = quantity demanded
P2= price of product = 200*(1+.01)= 200*1.01= 202 cents
Px= price of competitor’s product = (300 cents)
I = per capita income ($5,000)
A =monthly advertising expenditures ($675)
QD2 = -2000 – (100*202) + (15*640) + (25*300) + 10(5000)
QD2= -2000 – 20,200 + 9600 + 7500 + 50,000
QD2=$44,900
COMPUTATION OF ELASTICITY:
ED = ((QD2-QD1)/QD1)) / ((P2-P1)/P1)
ED= (44,900-45,100)/44,900) / (202-200)/200
ED =0
Determine the implications for each of the computed elasticities for the business in terms of short-term and long-term pricing strategies.
The demand that was calculated is less than 1, which means that the demand is inelastic. This means that the increase in price resulted in a decrease in quantity demanded. This means that there aren’t many substitutes for this product because the greater the number of substitute goods within the relevant market, the more price

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