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# Applications of cross price elasticity values

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Explain in more detail how exactly the measurement will take place

Original question: Can we use the concept of price elasticity to identify a brand's competitors? How would that work?

Your response: Yes, you can use the price elasticity concept to identify a brand's competitor. For example if you are a coffee drinker who likes to use a flavored cream as a complement. Let's say your favorite coffee creamer is International Delight's Hazelnut's liquid flavor, which charges a premium price. If for some reason you have found a product that yields the same satisfaction at a lower price, you can purchase generic substitute creamer with the same flavor, say in powder this time, at a cheaper price, and could last longer than your liquid brand creamer. So the percentage change in the quantity demanded of your brand coffee creamer will change as a result of a percentage in price of another close substitute.

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Can we use the concept of price elasticity to identify a brand's competitors? How would that work?

Yes, we can use the concept of price elasticity of demand to identify a brand's competitors.

Cross price elasticity helps us to study the affect of price changes on the quantity demanded of a product in consideration. If cross price elasticity of a product with ...

#### Solution Summary

The solution discusses how can the elasticity concept be useful in identifying a brand's competitor.

\$2.19

## Advanced Demand Analysis for Managers

Please see attached document with discussion questions and integrating problem.

Valerie Smith
Managerial Economics
18 January 2009
CHPT 3 AND 4

Chapter 3 question #11 on page 127
11. Suppose that the cross-price elasticity of demand between McIntosch and Golden Delicious apples is 0.8, between apples and apple juice is 0.5, between apples and cheese is 0.4, and between apples and beer is 0.1. What can you say about the relationship between each set of commodities?

Chapter 4 question #11 on page 177
11. Does regression analysis imply causality? Explain

Integrating Problem # 15 page 129
The research department of the Corn Flakes Corporation (CFC) estimated the following regression for the demand of the cornflakes it sells:
Qx=1.0-2.0Px+1.5I+0.8Py-3.0Pm+1.0A
Where Qx= sales of CFC cornflakes, in millions of 10-ounce boxes per year
Px= the price of CFC cornflakes, in dollars per 10-ounce box
I= personal disposable income, in trillions of dollars per year
Py= price of competitive brand of cornflakes, in dollars per 10-ounce box
Pm- price of milk, in dollars per quart
A= advertising expenditures of CFC cornflakes, in hundreds of thousands of dollars per year
This year, Px =\$2, I=\$4, Py=\$2.50, Pm = \$1, and A = \$2
a) Calculate the sales of CFC cornflakes this year.

b) Calculate the elasticity of sales with respect to each variable in the demand function.

c) Estimate the level of sales next year if CFC reduces Px by 10 percent, increases advertising by 20 percent, I rises by 5 percent, Py is reduced by 10 percent, and Pm remains unchanged.

d) By how much should CFC change its advertising if it wants its sales to be 30 percent higher than this year?

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