Assignment:
Using the regression results and the other computations from Assignment 1 below, determine the market structure in which the low-calorie food company operates.
Imagine that you work for the maker of a leading brand of low-calorie microwavable food that estimates the following demand equation for its product using data from 26 supermarkets around the country for the month of April.
Use the following demand equation concerning the questions of this assignment. This equation has been estimated through linear regression. The independent variables are: price of the product discussed in this assignment (P), advertising expenditure (A), price of leading competitor's product (C), per capita income (I) in the area, and number of microwave ovens sold in the area. The standard errors of estimation are in parentheses below the equation.
QD = - 5200 - 42P + 20C + 5.2(I) + 0.20(A) + 0.25(M)
(2) (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:
QD = Quantity demanded
P (in cents) = Price of the product = 500
C (in cents) = Price of leading competitor's product = 600
I (in dollars) = Monthly average income in the area = 5,500
A (in dollars) = Monthly advertising expenditures = 10,000
M = Number of microwave ovens sold in the area = 5,000
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.
3. Recommend whether you believe that this firm should or should not cut its price to increase its market share. Provide support for your recommendation.
4. 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.
A. Plot the demand curve for the firm.
B. Plot the corresponding supply curve on the same graph using the supply function Q = 5200 + 45P with the same prices.
C. Determine the equilibrium price and quantity.
5. Indicate the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves.