Question 1) Aksala Manufacturing has estimated the following demand curve for its colored ice cube product:
SUMMARY OUTPUT Dependent Variable:
Log P
Regression Statistics
Multiple R 0.687879
R Square 0.684469
Adjusted R Square 0.659021
Standard Error 3039.897
Observations 50
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ANOVA
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df
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SS
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MS
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F
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Significance F
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Regression
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2
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78800385
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39400193
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4.263641
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0.019879
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Residual
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47
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4.34E+08
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9240973
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Total
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49
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5.13E+08
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Coefficients
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Standard Error
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t Stat
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P-value
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Intercept
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3.532
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5.569665375
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1.79544
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0.079015
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Log Q
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-0.845500
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0.680373934
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-2.93956
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0.003056
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Log Y
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0.340998
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0.012051041
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2.76601
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0.008086
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where log P is the natural log of the price, log Q is the natural log of quantity sold, and log Y is the natural log of income.
a) What is the price elasticity of demand?
On question 1, note that log p is the dependent variable. Is this the way we usually estimate demand? Also note, the data is in log. Remember the secret for determining elasticity when the regression is log-log.
Question 2) Snell Software Corp (SSC) sells three different varieties of software. The each variety is marketed by a separate division within the organization.
a) SSC is trying to decide whether to outsource customer service. What issues Snell should consider in making there decision whether to outsource or not?
b) SSC has decided not to outsource. What price should Snell Customer Support charge each of SSC’s software division?
c) SSC has found that it has excess capacity in its Customer Support Unit and has decided to market its services externally, how does this change your answer to (b)?