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12 Aug 2019

The Klein Corporation’s marketing department, using regression analysis, estimates the firm’s demand function, the result being

Q = -104 - 2.1P + 3.2I + 1.5A + 1.6Z

(R2 = 0.89) where Q is the quantity demanded of the firm’s product (in tons), P is the price of the firm’s product (in dollars per ton), I is per capita income (in dollars), A is the firm’s advertising expenditure (in thousands of dollars), and Z is the price (in dollars) of a competing product. The regression is based on 200 observations.

Klein Corporation’s demand curve-Q=17,526-2.1P

Estimation of the quantity demanded of the Klein Corporation’s product with p=500 is 16,476

Calculate the price elasticity of demand, Income elasticity of demand, cross-price elasticity of demand, and Advertising elasticity of demand for the firm’s product and interpret their results.

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Related questions

A firm has estimated the following demand function for its product:

Q = 100 - 5P + 5I + 15A

Where Q is the quantity demanded per month in thousands, P is product price, I is an index of consumer income, and A is advertising expenditures per month in thousands. Assume that P = $200, I = 150, and A = 30. For simplicity in calculating the results, use the point elasticity formulas to complete the calculations indicated below.

(i) Calculate the quantity demanded.
(ii) Calculate the price elasticity for demand. Is demand elastic, inelastic, or unit elastic?
(iii) Calculate the income elasticity of demand. Is the good normal or inferior?
(iv) Calculate the advertising elasticity of demand.

From the scenario for Katrina’s Candies, examine the procedure Herb will use to estimate the "demand model" for this product and comment on the expected price elasticity, income elasticity, and cross price elasticity of demand. That is, do you expect demand to be price elastic or inelastic? Will the income elasticity suggest Katrina Candies is a luxury or a necessary good? And, is there likely to be a strong cross price elasticity with the other products that Herb included in his demand model? Explain your answers. What can you determine about consumer demand for a product whose estimated demand elasticities are as follows: Price Elasticity of demand is -0.85 Income Elasticity of demand is 2.5 Cross Price Elasticity of demand with this product and your product is -2 I would like you to think about this simple formula for predicting the change in total revenue when there is a given percentage change in price. Using the example above, if ED (price elasticity of demand) is -.85, then a 10% increase in price will cause the quantity demanded to fall by 8.5%, (-8.5% / 10% = -.85). The Formula for Predicting % Changes in Total Revenue is: %ΔTR = %ΔQ + %ΔP where TR = Total Revenue, Q is Quantity Demanded and P = price. Using this formula, what would be the % Δ in TR if ED is -.85 and the %ΔP is 10%?

The maker of a leading brand of low-calorie microwavable 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 + 5.2l + 0.20A + 0.25M

(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 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

1. Calculate the quantity using the given values for the independent variables.

2. Calculate the price elasticity of demand.

3.

Based on the price elasticity of demand, do you think that this firm should cut its price to increase its market share?

a. No, demand is inelastic so cutting price would reduce revenue.

b. No, demand is elastic so cutting price would reduce revenue.

c. Yes, demand is inelastic so cutting price would increase revenue.

d. Yes, demand is elastic so cutting price would increase revenue.

4. Using the information in question 1, compute the income elasticity.

5. Based on the price elasticity of income, do you think that this company would be extremely concerned about the impact of a recession on its sales?

a. Yes, income elasticity is relatively high, so a recession (with lower income) would likely reduce sales.

b. Yes, income elasticity is relatively low, so a recession (with lower income) would likely reduce sales.

c. No, income elasticity is relatively high, so a recession would not have a large impact on sales.

d. No, income elasticity is relatively low, so a recession would not have a large impact on sales.

6. What proportion of the variation in sales is explained by the independent variables in question 1?

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