Demand Estimation: Option 1 Writing Assignment

Demand Estimation: Option 1
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Demand Estimation: Option 1Note: 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 = 4.88Q = 3-pack unitsP =cents per 3-pack unitPX = 600 cents per 3-pack unitI =$5,500A = $10,000M = 5,0001] Compute the elasticities for each independent variable. Note: Write down all of your calculations.
Q = 3-pack units, P = 500cents per 3-pack unit, PX = 600 cents per 3-pack unitI =$5,500, A = $10,000, M = 5,000
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
QD = -5,200 – 42(500) +20(600) +5.2($5,500)+ 0.20($10,000)+0.25(5,000)= 17,650
Price elasticity= (P/Q) (∆Q/∆P)
In the regression line the price variable is -42
P=500 when Q=17,650
EP- Price elasticity= -42*(500/17,650) = -42*0.028329= -1.1898=-1.19
EA= 0.20* (10000/17650) = 0.11
EC= 20* (600/17560) = 0.68
EI = (5.2)*(5500/17650) =1.62
EM=0.25*(5,000/17,650) =0.07
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]
The price elasticity is -1.19, and measures the responsiveness of quantity demanded to price changes, it is reflected as percentage change in the quantity demanded to percentage change in price (WHO, n.d.). A1% drop in the quantity demanded will result with a 1.19% increase in quantity demanded.
The advertising elasticity is 0.11 and measures the responsiveness of good’s demand to changes in advertising expenditure. While expenditure on advertisements promotes sales it is to a lesser degree compared to the other levels of total sales and sales promotion activities. Since the elasticity of the microwave is 0.07 there is a small positive relationship between prices of the product and demand for microwaves.
Cross price elasticity is +0.68 and measures the responsiveness of demand for one good to change in the price of another good. When the Cross price elasticity>0 when the demand for the other good and price change in the same direction (Mcguigan, Moyer & Harris, 2014). A 1% increase in the price of one good leads to a +0.68% demand for the other, and there is high substitutionality. When making decisions on substitute products, it is important to consider how price changes affect the demand for each good. In any case, Cross price elasticity helps to determine products that are, complementary, directly competitive or substitute goods.
The income elasticity is 1.62 and indicates that a 1% change in income will result in a 1.62% change in consumption in the same direction. The quantity of goods demanded will increase when income rises as the price is elastic as more people can afford to pay for the products at higher prices when their incomes rise (WHO, n.d.).
In the option, the changes in price has indirect effects on the quantity of goods demanded, but advertising and income have a positive relation on the...