Question

The maker of a leading brand of low-calorie microwavable food estimated the following demand equation for its producer using data from 26 supermarkets around the country for the month of April: Q = -5,200 - 42P + 20Px+ 5.2I + 0.20A+ 0.25M Standard Errors (2.002) (17.5) (6.2) (2.5) (0.09) (0.21) R2 = 0.55 n = 26 F = 4.88 III. Assume the following values for the independent variables: IV. Q = Quantity sold per month P (in cents) = Price of the product = 500. (Note: No need to convert to dollars.) Px (in cents) = Price of leading competitor's product = 600 (Note: No need to convert to dollars.) I (in dollars) = Per capita income of the Standard Metropolitan Statistical Area (SMSA) in which the supermarket is located = 5,500 (Note: No need to convert to cents.) A (in dollars) = Monthly advertising expenditure = 10,000. (Note: No need to convert to cents.) M = Number of microwave ovens sold in the SMSA in which the supermarket is located = 5,000 V. Using this information, answer the following: A. Compute the elasticity for each variable. Q = -5,200 – 42P + 20Px + 5.2I + 0.20A + 0.25M

Answer 1

PRICE OF THE PRODUCT

Elasticity = (dQ / dP) x (P / Q)

= -42 X (500 / 500)

= -42 X 1 = -42 is the answer.

PRICE OF LEADING COMPETITOR'S PRODUCT

Elasticity = (dQ / dP_X) x (P_X / Q)

= 20 x (600 / 500)

= 24 is the answer.

PER CAPITA INCOME

Elasticity = (dQ / dI) x (I / Q)

= (5.2) x (5500 / 500)

= 5.2 x 11 = 57.2 is the answer.

MONTHLY ADVERTISING EXPENDITURE

Elasticity = (dQ / dA) x (A / Q)

= (0.2) x (10,000 / 500)

= 0.2 x 20 = 4 is the answer.

NUMBER OF MICROWAVE OVENS

Elasticity = (dQ / dM) x (M / Q)

= (0.25) x (5000 / 500)

= 0.25 x 10 = 2.5 is the answer.