Question

2) Office Enterprises (OE) produces a line of metal office file cabinets. The company’s economist, having investigated a large number of past data, has established the following equation of demand for these cabinets: Q = 10,000 + 60B – 100P + 50C where Q = Annual number of cabinets sold B = Index of nonresidential construction P = Average price per cabinet charged by OE C = Average price per cabinet charged by OE’s closest competitor It is expected that next year’s nonresidential construction index will stand at 160, OE’s average price will be $40, and the competitor’s average price will be $35.

a) Forecast annual sales.

b) What will be the new sales forecast if the competitor lowers its price to $32?

c) What will be the new sales forecast if OE reacts to the decrease mentioned in the previous question by lowering its price to $37? (The competitor’s price will now be $32 and the firm’s own price will be $37.) d) If the index forecast was wrong, and it turns out to be only 140 next year, what will be OE’s projected sales assuming the original price information of P = $40 and C = $35?

Answer 1

The equation of demand is Q = 10,000 + 60B – 100P + 50C. Expected value of B is 160 next year, and similarly, expected value of P will be $40, and that of C will be $35.

a) Forecasted annual sales are QE = 10,000 + 60*160 – 100*40 + 50*35 = 17,350 units.

b) The new sales forecast if the competitor lowers its price to $32, will be QEnew = 10,000 + 60*160 – 100*40 + 50*32 = 17200.

c) The new sales forecast if OE reacts to the decrease mentioned in the previous question by lowering its price to $37 is QEnew’’ = 10,000 + 60*160 – 100*37 + 50*32 = 17,500 units

d) If the index forecast was wrong, and it turns out to be only 140 next year, OE’s projected sales assuming the original price information of P = $40 and C = $35 will be QE* = 10,000 + 60*140 – 100*40 + 50*35 = 16,150 units.