The maker of a leading brand of low-calorie microwavable food estimates the following demand equation for its product using data from 26 supermarkets around the country for the month of April.
Q = - 5200 - 42P + 20PX + 5.2I + .20A + .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 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
Using this information, answer the following questions:
a. Compute elasticities for each variable.
b. How concerned do you think this company would be about the impact of a recession on its sales? Explain. (Hint: Interpret income elasticity coefficient.)
c. Do you think that this firm should cut its price to increase its market share? Explain. (Hint: Refer to the price elasticity of demand.)
d. What portion of the variation in sales is explained by the independent variables in the equation? How confident are you about this answer? Explain. (Hint: Interpret R2 and F.)