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Maximizing Revenue and Determining Demand

Shoes For Less (SFL) hires you to determine the demand for their shoes, and you estimate this to be:

Qd = 32,000 - 1200P + 600Pc + 1.2Y + 0.06A

where the independent variables are respectively: price of SFL's shoes, price of competitors' shoes, per capita income (in $) and advertising (in $) by SFL. You observe that competitors have, on average, priced their shoes at $40, while SFL charges $35. Per capita income level in the store's geographic market averages $25,000. SLF's advertising expenditure is $550,000 per month.

i) Explain clearly to your client what each of the coefficients means.

ii) Should SFL expand to wealthier areas?

iii) What should SFL do to maximize revenue?

iv) Should SFL increase its advertising expenditure?

v) A prior consultant had originally estimated the demand for SFL's shoes, and obtained:

Qd = 50,000 - 500P + 100Pc + 0.1Y

Explain the difference in the results between your results and those of the original consultant.

Solution Preview

Below is your tutorial

i) Explain clearly to your client what each of the coefficients means.

A unit increase in the price of shoes sold by SFL results to a 1,200 decrease in shoes demanded. A unit increase in the price of the competitors' shoes results to a 600 unit increase in the demand for SFL shoes. A unit increase in per capita income will result to a 1.2 unit increase in the quantity demanded for the shoes sold by SFL ...

Solution Summary

Maximizing revenues and determining demands are examined. The expert determines the demand for shows estimated.

$2.19