# Managerial Economics and Globalization

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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.

For a refresher on independent and dependent variables, please go to Sophia's Website and review the Independent and Dependent Variables tutorial, located at http://www.sophia.org/tutorials/independent-and-dependent-variables--3.

Option 1

Note: The following is a regression equation. Standard errors are in parentheses for the demand for widgets.

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

(2.002) (17.5) (6.2) (2.5) (0.09) (0.21)

R2 = 0.55 n = 26 F = 4.88

Your supervisor has asked you to compute the elasticities for each independent variable. Assume the following values for the independent variables:

Q = Quantity demanded of 3-pack units

P (in cents) = Price of the product = 500 cents per 3-pack unit

PX (in cents) = Price of leading competitor's product = 600 cents per 3-pack unit

I (in dollars) = Per capita income of the standard metropolitan statistical area

(SMSA) in which the supermarkets are located = $5,500

A (in dollars) = Monthly advertising expenditures = $10,000

M = Number of microwave ovens sold in the SMSA in which the

supermarkets are located = 5,000

Option 2

Note: The following is a regression equation. Standard errors are in parentheses for the demand for widgets.

QD = -2,000 - 100P + 15A + 25PX + 10I

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

R2 = 0.85 n = 120 F = 35.25

Your supervisor has asked you to compute the elasticities for each independent variable. Assume the following values for the independent variables:

Q = Quantity demanded of 3-pack units

P (in cents) = Price of the product = 200 cents per 3-pack unit

PX (in cents) = Price of leading competitor's product = 300 cents per 3-pack unit

I (in dollars) = Per capita income of the standard metropolitan statistical area

(SMSA) in which the supermarkets are located = $5,000

A (in dollars) = Monthly advertising expenditures = $640

Answer these questions in 4-6 pages::

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.

a. Plot the demand curve for the firm.

b. Plot the corresponding supply curve on the same graph using the following MC / supply function Q = -7909.89 + 79.1P with the same prices.

c. Determine the equilibrium price and quantity.

d. Outline the significant factors that could cause changes in supply and demand for the low-calorie, frozen microwavable food. Determine the primary manner in which both the short-term and the long-term changes in market conditions could impact the demand for, and the supply, of the product.

5. Indicate the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves for the low-calorie, frozen microwavable food.

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##### Solution Summary

The response addresses the query posted in 990 words with APA references, finding the elasticities for each independent variable, implications for the business through the short and long term pricing strategies, finds the demand curve for the firm and determines the equilibrium price and quantity.

##### Solution Preview

//For business organizations, demand forecasting can be considered as one of the crucial and essential aspects. In this regard, the presented section is reflecting the elasticity of different independent variables included in the research work. In addition to this, the section also highlights the implications of computed elasticities of the variables in terms of short as well as long-term pricing strategy//

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

The given value of the variable as below

PX= 600, P= 500, A=10,000, I=5500, M=5000

There is a need to apply the regression equation to find the elasticity of the independent variable.

QD= - 5200 - 42*(500) + 20*(600) + 5.20*(5500) + 0.25*(5000) + 0.20*(10000) = 17,650 (Wang & Jain, 2003).

Price Elasticity is equal to (P/Q) *(∆Q/∆P)

The Outcomes of the regression equation solution provides ∆Q/∆P = -42.

Price Elasticity (Ep) = (-42)*(500/17650) = -1.19

Ec = 20(600/17560) = 0.68

EM = (0.25)*(5000/17650) = 0.0700

EI = (5.20)*(5500/17650) = 1.6200

EA= (0.20)*(10000/17650) = 0.1100

2. The income elasticity is 1.62 that shows one percentage change average area income will result in the change 1.62 in demand quantity. The increase of income of one percent will increase the demand by 1.62% and in a similar way; the decrease 1% will decrease the demand by 1.62% (Wang & Jain, 2003).

The region's microwave ovens elasticity is 0.07 that shows one percent change region's microwave ...

###### Education

- MBA (IP), International Center for Internationa Business
- BBA, University of Rajasthan

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