Imagine that you work for the maker of a leading brand of low-calorie, frozen microwavable food that estimates the following demand equation for its product using data from 26 supermarkets around the country for the month of April.
Note: The following is a regression equation. Standard errors are in parentheses.
QD = -2,000 - 100P + 15A + 25PX + 10Y
(5,234) (2.29) (525) (1.75) (1.5
R2 = 0.85 n = 26 F = 35.25
Your supervisor has asked you to compute the elasticities for each independent variable. Assume the following values for the independent variables:
QD = Quantity demanded of a unit (dependent variable)
P (in cents) = 200 cents per unit (price per unit)
PX (in cents) = 300 cents per unit (price of leading competitor's product)
Y (in dollars) = $5,000 (per capita income in the Standard Metropolitan Statistical
Area (SMSA) where the 26 supermarkets are located)
A (in dollars) = $640 (monthly advertising expenditures)
1. Compute the elasticities for each independent variable. Note: Write down all of your calculations.
4. Assume that all the factors affecting demand in this model remain the same, but that the price has changed. Further assume that the prices are 100, 200, 300, 400, 500, 600 cents.
Plot the demand curve for the firm.
Plot the corresponding supply curve on the same graph using the following MC / supply function (with the same prices 100, 200, 300, 400, 500, and 600 cents):
QS = -7909.89 + 79.0989P
Determine the equilibrium price and quantity.