Assignment 1: Demand Estimation

Assignment 1: Demand Estimation.

Assignment 1: Demand Estimation
Due Week 3 and worth 200 points

Imagine that you work 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.

For a refresher on independent and dependent variables, please go to Sophia’s Website and review the Independent and Dependent Variables tutorial, located at http://www.sophia.org/tutorials/independent-and-dependent-variables–3.

Option 1
Note: The following is a regression equation. Standard errors are in parentheses 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

Your supervisor has asked you to compute the elasticities for each independent variable. Assume the following values for the independent variables:

Q          =          Quantity demanded 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 supermarkets are located = $5,500
A (in dollars)     =          Monthly advertising expenditures = $10,000
M                     =          Number of microwave ovens sold in the SMSA in which the
supermarkets are located = 5,000

GUIDELINES

Write a four to six (4-6) page paper in which you:

1. Compute the elasticities for each independent variable. Note: Write down all of your calculations.
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.

1. Recommend whether you believe that this firm should or should not cut its price to increase its market share. Provide support for your recommendation.
2. 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.
   1. Plot the demand curve for the firm.
   2. Plot the corresponding supply curve on the same graph using the following MC / supply function Q = -7909.89 + 79.1P with the same prices.
   3. Determine the equilibrium price and quantity.
   4. Outline 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.
3. Indicate the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves for the low-calorie, frozen microwavable food.
4. Use at least three (3) quality academic resources in this assignment. Note: Wikipedia does not qualify as an academic resource.

Your assignment must follow these formatting requirements:

• Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
• Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.

The specific course learning outcomes associated with this assignment are:

• Analyze how production and cost functions in the short run and long run affect the strategy of individual firms.
• Apply the concepts of supply and demand to determine the impact of changes in market conditions in the short run and long run, and the economic impact on a company’s operations.
• Use technology and information resources to research issues in managerial economics and globalization.
• Write clearly and concisely about managerial economics and globalization using proper writing mechanics.

Additional info for assignment: 

Hints for Assignment 1

 Please review the following files posted in Week 2 Instructor Insights.

 Demand Estimation – Sample Analytical Problem

1. It shows how elasticities are calculated for the independent variables in the regression equation.
   1. It also shows how you can interpret the elasticities.

• Graphing Supply and Demand Instructions and Graphing Supply and Demand Sample Problem
  • These files will show you how to graph in Excel.

 Under Instructor Insights, you can find additional material on demand estimation and using Excel.

 IMPORTANT!!! You should use Option 1.  Ignore Option 2.

 Question 1:

 You should compute the elasticity for each independent variable as shown in the sample analytical problem mentioned above.

 Note: Do not convert the cents into dollars.

 Question 2: 

Interpret the elasticities as shown in the sample analytical problem.

 Question 3: 

You should look at the price elasticity of demand to answer this question. If the absolute value of elasticity is smaller than 1, the demand is inelastic, and the company would lose revenue if it cuts its price.  If the absolute value of elasticity is bigger than 1, then the demand is price elastic and the company would increase its market share and its revenue if it cuts the price.

 Question 4:

 The supply function is given to you. It is Q = -7909.89 + 79.0989P. You have to calculate the demand function.  The regression equation is the demand function, but you have to keep all factors that affect the demand constant, except for the price.  So, you can plug in the provided values of Px, I, A, and M in the regression equation.  Thus, you will derive the demand function, which shows the relationship between quantity demanded and price assuming that nothing else changes.

Here is and example based on the demand equation in the sample analytical problem.

Q_D = 15,000  –  10 P  +  1500 A  +  4 P_X  +  2 I

Q = Quantity demanded

P = Price = 7,000

A = Advertising expense, in thousands = 54

P_X = Price of competitor’s product = 8,000

I = Average monthly income = 4,000

Q_D = 15,000  –  10 P  +  1500 (54) +  4 (8,000) +  2 (4,000)

Q_D = 15,000  –  10 P  +  81,000 +  32,000+  8,000

Q_D = 136,000  –  10 P  (this is the demand function)

Follow the graphing instructions to plot the demand curve.

• Enter in one column the prices 100, 200,…,600
• Calculate the quantity demanded at each price using the demand function in a second column.
• Then, graph the demand curve using the graphing instructions.

1. Use the supply function and follow the instructions to graph it.
2. The equilibrium point would be the point of intersection between demand and supply curves.  The equilibrium price corresponding to this point is on the vertical axis, and the equilibrium quantity corresponding to this equilibrium point is on the horizontal axis.
3. To answer this question, review the demand and supply factors.

 Question 5:

 Consider the most important factors other than the price of the product that can affect the demand and supply of low-calorie microwavable food. You can do some research on the demand and supply conditions in this market.

Assignment 1: Demand Estimation
Due Week 3 and worth 200 points

Imagine that you work 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.

For a refresher on independent and dependent variables, please go to Sophia’s Website and review the Independent and Dependent Variables tutorial, located at http://www.sophia.org/tutorials/independent-and-dependent-variables–3.

Option 1
Note: The following is a regression equation. Standard errors are in parentheses 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

Your supervisor has asked you to compute the elasticities for each independent variable. Assume the following values for the independent variables:

Q          =          Quantity demanded 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 supermarkets are located = $5,500
A (in dollars)     =          Monthly advertising expenditures = $10,000
M                     =          Number of microwave ovens sold in the SMSA in which the
supermarkets are located = 5,000

GUIDELINES

Write a four to six (4-6) page paper in which you:

1. Compute the elasticities for each independent variable. Note: Write down all of your calculations.
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.

1. Recommend whether you believe that this firm should or should not cut its price to increase its market share. Provide support for your recommendation.
2. 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.
   1. Plot the demand curve for the firm.
   2. Plot the corresponding supply curve on the same graph using the following MC / supply function Q = -7909.89 + 79.1P with the same prices.
   3. Determine the equilibrium price and quantity.
   4. Outline 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.
3. Indicate the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves for the low-calorie, frozen microwavable food.
4. Use at least three (3) quality academic resources in this assignment. Note: Wikipedia does not qualify as an academic resource.

Your assignment must follow these formatting requirements:

• Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
• Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.

The specific course learning outcomes associated with this assignment are:

• Analyze how production and cost functions in the short run and long run affect the strategy of individual firms.
• Apply the concepts of supply and demand to determine the impact of changes in market conditions in the short run and long run, and the economic impact on a company’s operations.
• Use technology and information resources to research issues in managerial economics and globalization.
• Write clearly and concisely about managerial economics and globalization using proper writing mechanics.

Additional info for assignment: 

Hints for Assignment 1

 Please review the following files posted in Week 2 Instructor Insights.

 Demand Estimation – Sample Analytical Problem

1. It shows how elasticities are calculated for the independent variables in the regression equation.
   1. It also shows how you can interpret the elasticities.

• Graphing Supply and Demand Instructions and Graphing Supply and Demand Sample Problem
  • These files will show you how to graph in Excel.

 Under Instructor Insights, you can find additional material on demand estimation and using Excel.

 IMPORTANT!!! You should use Option 1.  Ignore Option 2.

 Question 1:

 You should compute the elasticity for each independent variable as shown in the sample analytical problem mentioned above.

 Note: Do not convert the cents into dollars.

 Question 2: 

Interpret the elasticities as shown in the sample analytical problem.

 Question 3: 

You should look at the price elasticity of demand to answer this question. If the absolute value of elasticity is smaller than 1, the demand is inelastic, and the company would lose revenue if it cuts its price.  If the absolute value of elasticity is bigger than 1, then the demand is price elastic and the company would increase its market share and its revenue if it cuts the price.

 Question 4:

 The supply function is given to you. It is Q = -7909.89 + 79.0989P. You have to calculate the demand function.  The regression equation is the demand function, but you have to keep all factors that affect the demand constant, except for the price.  So, you can plug in the provided values of Px, I, A, and M in the regression equation.  Thus, you will derive the demand function, which shows the relationship between quantity demanded and price assuming that nothing else changes.

Here is and example based on the demand equation in the sample analytical problem.

Q_D = 15,000  –  10 P  +  1500 A  +  4 P_X  +  2 I

Q = Quantity demanded

P = Price = 7,000

A = Advertising expense, in thousands = 54

P_X = Price of competitor’s product = 8,000

I = Average monthly income = 4,000

Q_D = 15,000  –  10 P  +  1500 (54) +  4 (8,000) +  2 (4,000)

Q_D = 15,000  –  10 P  +  81,000 +  32,000+  8,000

Q_D = 136,000  –  10 P  (this is the demand function)

Follow the graphing instructions to plot the demand curve.

• Enter in one column the prices 100, 200,…,600
• Calculate the quantity demanded at each price using the demand function in a second column.
• Then, graph the demand curve using the graphing instructions.

1. Use the supply function and follow the instructions to graph it.
2. The equilibrium point would be the point of intersection between demand and supply curves.  The equilibrium price corresponding to this point is on the vertical axis, and the equilibrium quantity corresponding to this equilibrium point is on the horizontal axis.
3. To answer this question, review the demand and supply factors.

 Question 5:

 Consider the most important factors other than the price of the product that can affect the demand and supply of low-calorie microwavable food. You can do some research on the demand and supply conditions in this market.

Assignment 1: Demand Estimation

Thanks for installing the Bottom of every post plugin by Corey Salzano. Contact me if you need custom WordPress plugins or website design.