Questions:
1) Questions 1 through 5 are based on the following scenario (adapted from Chapter 5 demand estimation question number 3, p.163) The maker of a leading brand of low-calorie microwavable food estimated the following demand equation for its product using data from 26 supermarkets around the country for the month of April: Q = -5,200 - 42P + 20Px + 5.2l + 0.20A + 0.25M (2.002) (17.5) (6.2) (2.5) (0.09) (0.21) R2 = 0.55 n = 26 F = 4.88 Assume the following values for the independent variables: Q = Quantity sold per month P (in cents) = Price of the product = 500 Px (in cents) = Price of leading competitor's product = 600 I (in dollars) = Per capita income of the standard metropolitan statistical area (SMSA) in which the supermarket is located = 5,500 A (in dollars) = Monthly advertising expenditure = 10,000 M = Number of microwave ovens sold in the SMSA in which the supermarket is located = 5,000 Calculate the quantity using the given values for the independent variables.
2) Refer to question 1. Calculate the price elasticity of demand. Hint: Use the point elasticity method described on A numeric example is demonstrated in the second paragraph on that page.
3) Based on the price elasticity of demand, do you think that this firm should cut its price to increase its market share? No, demand is inelastic so cutting price would reduce revenue.
No, demand is elastic so cutting price would reduce revenue.
Yes, demand is inelastic so cutting price would increase revenue.
Yes, demand is elastic so cutting price would increase revenue.
4) Using the information in question 1, compute the income elasticity.
5) Based on the price elasticity of income, do you think that this company would be extremely concerned about the impact of a recession on its sales?
Yes, income elasticity is relatively high, so a recession (with lower income) would likely reduce sales.
Yes, income elasticity is relatively low, so a recession (with lower income) would likely reduce sales.
No, income elasticity is relatively high, so a recession would not have a large impact on sales.
No, income elasticity is relatively low, so a recession would not have a large impact on sales.
6) What proportion of the variation in sales is explained by the independent variables in question 1?