## Demand Estimation: Compute the elasticities for each independent variable. Note: Write down all of your calculations.

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 price changes are 100, 200, 300, 400, 500, 600 cents.
1. Plot the demand curve for the firm.
2. Plot the corresponding supply curve on the same graph using the following MC / supply function Q = -7909.89 + 79.1P with the same prices…..

## Possible Solution:

##### 1.      Computation of the elasticities for each independent variable

QD = – 5200 – 42P + 20PX + 5.2I + 0.20A + 0.25M

Considering that PX=600, P= 500, A=10,000, I=5,500 and M=5000, the application of the regression methodology leads to the following:

QD= – 5200 – 42(500) + ….+ 0.25(5000) + 0.20(10000) = 17,650

Price Elasticity = (P/Q) (ΔQ/ΔP)

The Results from the regression equation shows that: ΔQ/ΔP = -42.

For that reason, Price Elasticity (Ep) = (P/Q) (-42) (500/17650) = -1.19

Ec = 20(600/17560) = 0.68

EM = (P/Q) (0.25) (5000/17650) = 0.07

EI = (P/Q) (5.20)….

EA= (P/Q) (0.20) (10000/17650) = 0.11

##### 2.      Determine the implications for each of the computed elasticities for the business in terms of short-term and long-term pricing strategies.

Based on the calculated income elasticity above (1.62), it is evident that an increase of one percent in the area income is likely to influence the quantity in demand in the locality. The increase in the demand is likely to be 1.62% thus illustrating elasticity. Such elasticity shows the likelihood of the enterprise adjusting the pricing strategies with the increase in the average income scenario.

The elasticity of the microwave ovens has been computed at 0.07. Such scenario shows that there is a possibility of the 0.07% increase in demand if there is an increase of 1% in the microwave ovens number. This situation shows a probability of inelasticity. Therefore, the adoption of that pricing strategy is not likely to focus on the pieces of microwave ovens as an aspect determining the quantity demand significantly.

From the above calculations, the Price Elasticity has been identified as -1.19. Therefore, the increase in 1% in the pricing of the microwave ovens is likely to decrease the quantity demand to 1.19%. Such scenario is a clear indication of a slight elasticity degree….