## Supply & Demand Analysis

Where’s the Beef? Supply & Demand Analysis (30 Points)

King Ranch, a huge enterprise in South Texas produces one of the best Angus Steaks sold in the state of Texas. Dr. Sally Joe Cummings – an Agricultural economist at Texas A& M works as a consultant. Dr. Cummings, is tasked to offer answers to analyze the following possible scenarios.

EVENTS:

A major winter freeze in Texas driving up prices of hay & feed.

The animal scientists at Texas Tech University discover a new gene to increase the rate of conversion of input into output resulting in more weight gain per cow

The American College of Endocrinology releases the results of a study which concludes that consuming beef can significantly raise the risk of diabetes.

Truckers demand higher wages as a result of shortage and potential exposure to Covid

The price of poultry falls.

TASKS:

As a GA for Dr. Cummings, how will you help her with the responses:

Identify if in each case if it’s a supply or demand related event

Relate the event if it is a non-price determinant associated with supply or demand and label which determinant it relates to (see CH 3)

As a result of the event, will the supply or demand curve shift to the right/left or a movement along the curve, explain why, and the consequent rationing and guiding functions?

The change in equilibrium prices and quantities

Please identify in each case if it can be classified as a “change in quantity demanded or a change in demand” and briefly explain why in each case.

II. Rooms & More; Beds and Recliners: (30 POINTS)

SHOW All Detailed Calculations

Suppose Dr. Ahmed Murtuza is working as a consultant for Rooms & More chain of stores in the Dallas area. He estimates the market demand for Basset Sofa-cum Beds as follows

Q = 840 – 0.50P

where Q = quantity demanded per period of time and P = price of Sofa cum Beds

1. Calculate the Price Elasticity of Demand using the Point Elasticity approach. If Rooms and More lower the price of Sofa cum Beds from $1000 to $800. Based on your results, should the firm raise or lower the price to increase revenues? Why? Explain. Would the total consumer expenditures for Sofa cum Beds rise, fall, or remain unchanged? Why?

2. When Rooms & More stores lower their price from $1000 to $800, what predictions, if any, can you make about the effect the price reduction would have upon the firm’s profits? Why or why not?

Rooms & More also sells 300 Recliners for $350 per unit. In early October 2021, Stacy’s Furniture stores, a major competitor cut the price of their Recliners from $400 to $300. As a result of this action, Rooms & More sales of their Recliners decreases from 300 per month to 250 units per month. Using this data, calculate the cross elasticity of demand between Rooms & More’s and Stacy’s Recliners. Based on the results, are these two companies’ weak or strong competitors? Why? Explain.

Offer some non-price strategies which Rooms & More can use to boost their ales and revenues and still remain profitable. Your responses should also be based using an economic framework – which of the choices you recommend would be the most effective and result in maximum profits.

(Hint: read Chapter 2 section on Costs and Profits).

III. Forecasting: (40 points) SHOW ALL DETAILED CALCULATIONS.

Suppose the following Demand equation is estimated for the most popular printers by using regression analysis: One example for Epson printer is as follows:

(standard errors in parentheses.)

Qx = 5500 – 10 Px + 0, 75 Ad – 3. 4 Py + 0.58 Inc

(1,732) (2.29) (1.36) (1.75) ( 0.15)

R2 = 0.65

Standard error of estimate = 34.3

Q = Quantity demanded

Px = Price of an Epson printer = $500

Ad = Monthly advertising expenditures (in thousands) 40 K = use 40 for calculations

Py = price of a related good = $350

Inc = average monthly income of buyers = $8,000

Answer the following questions based on the above equation and the data provided. (Show all work to receive full / partial credit)

Using the information given above, calculate the own price elasticity? Given your calculations, should Epson increase or reduce the price to maximize revenues

Calculate the advertising elasticity and show the impact of advertising on sales. Is it effective? If it is not, what other measures can Epson adopt to market their product to increase sales

Calculate the cross-price elasticity of demand for Epson printers? Is the related good a substitute or complement?

Why?

Calculate the income elasticity of demand. What and how much impact will a recession leading to a drop in the average income by 5% on sales of this product? Why?

Which regression coefficients are statistically significant? Why? What does R2 actually mean? Explain? What steps can be taken to increase it to a higher level?