The maker of a leading brand low-calorie microwave 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 + 5.21 + 0.20A + 0.25M
(2.002) (17.5) (6.2) (2.5) (0.09) (0.21)
Rsquared =0.55 n=26 F = 4.88
Assume following values:
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
A. Compute elasticity's for each variable.
Quantity sold per month.
Price of the product.
Price of leading competitor's product.
Per capita income
Monthly advertising
Microwaves
B. How concerned do you think this company would be about the impact of a recession on its sales? Explain.
C. Do you think that this firm should cut its price to increase its market share? Explain.
D. What proportion of the variation in sales is explained be the independent variables in the equation? How confident are you about this answer? Explain.