ECO 550 Assignment 1: Demand Estimation
ECO 550 Assignment 1: Demand Estimation Due Week 3 and worth 200 points 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. For a refresher on independent and dependent variables, please go to Sophia’s Website and review the Independent and Dependent Variables tutorial, located at http://www.sophia.org/tutorials/independentand- dependent-variables--3. Note: Your professor will provide you with the equation and data necessary for you to complete this assignment. You will find this information attached to Assignment 1 within the course shell. Write a four to six (4-6) page paper in which you: 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 shortterm 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 dollars. 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. d) Outline the significant factors that could cause changes in supply and demand for the product. Determine the primary manner in which both the short-term and the long-term changes in market conditions could impact the demand for, and the supply, of the product. 5. Indicate the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves. 6. Use at least three (3) quality academic resources in this assignment. Note: Wikipedia does not qualify as an academic resource. EQUATION Note: The following is the estimated regression equation representing the demand for Widgets as posited in Assignment 1. Standard errors are in parentheses. QD = 20,000 - 10P + 1500A + 5PX + 10I (5,234) (2.29) (525) (1.75) (1.5) R2 = 0.85 n = 120 F = 35.25 Your supervisor has asked you to compute the elasticities for each independent variable, ( P, A, PX, and I), in the equation. Assume the following values for the independent variables: Q = Quantity demanded P (in cents) = Price of the product = 8,000 PX (in cents) = Price of leading competitor’s product = 9,000 I (in dollars) = Per capita income of the standard metropolitan statistical area (SMSA) where the supermarkets are located = 5,000 A (in dollars) = Monthly advertising expenditures = 64
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