# 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

Complete, Neat and Step-by-step Solutions are provided in the attached file.