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Regression Equation: Elasticity of Demand, Demand Estimation

Directions: Clean Supreme is a company that manufactures and sells
powdered laundry detergent in the United States. The firm has estimated the
following regression equation for the demand of its Brand Z detergent:
QZ = 1.0 â?" 2.0PZ + 0.7I + 1.5PA + 0.5PB + 1.5A

Where QZ = sales of powdered laundry detergent brand Z, in millions of boxes per year
PZ = price of powdered laundry detergent brand Z, in dollars per box
I = personal disposable income, in trillions of dollars per year
PA = price of the competitive brand of powdered laundry detergent, in dollars per box
PB = price of liquid laundry detergent, in dollars per bottle
A = advertising expenses for powdered laundry detergent brand Z, in thousands of
dollars per year
1. For the current year, assume that PZ = $6, I = 2.3, PA = $6.25, PB =
$4.50, and A = $1.5. What is the expected demand of the Brand Z
detergent for this year?
2. Determine the elasticity of demand for Brand Z with respect to its price,
income, price of competitive brand of powdered laundry detergent,
price of liquid laundry detergent, and advertising.
3. With the elasticities developed in Question 2, estimate the demand for
Brand Z detergent in the next year given that Clean Supreme plans to
increase the price of Brand Z detergent by 2% and its advertising
expenses by 10%.
4. What types of managerial decisions could be made by examining the
elasticity of demand as you have in this problem?

Your answers should identify the demand for the current year; the elasticities
of demand with respect to its price, income, price of the competitive brand of
powdered laundry detergent, price of liquid laundry detergent, and advertising;
and the estimated demand given changes in price and advertising expenses.
Your answer should also include a discussion of the managerial decisions that
could be made by analysing elasticity of demand

Solution Summary

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