# Assignment 1: Demand Estimation

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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 = -3,750 – 100P + 25A + 50PX + 8Y

(5,234) (2.29) (525) (1.75) (1.5)

R2 = 0.90 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) = 300 cents per unit (price per unit)

PX (in cents) = 200 cents per unit (price of leading competitorâ€™s product)

Y (in dollars) = $10,000 (per capita income in the Standard Metropolitan Statistical Area (SMSA) where the 26 supermarkets are located)

A (in dollars) = $750 (monthly advertising expenditures)

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 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 prices are 100, 200, 300, 400, 500, 600, 700, and 800 cents.

Plot the demand curve for the firm.

Plot the supply curve ( QS= -7909.89 + 79.0989 P ) using the same prices 100, 200, 300, 400, 500, 600, 700, and 800 cents.

5. Determine the equilibrium price and quantity. (Show this graphically and/or calculate using algebra.)

6. What short-term and long-term changes in market conditions could shift the demand and supply curves for this product?

7. Use at least three (3) quality academic resources in this assignment. Note: Wikipedia does not qualify as an academic resource.

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