Assignment 1: Demand Estimation
Heather Warrelmann
Prof. Diana Bonina, Ph.D
ECO 550
April 25, 2015
Abstract
It is important to look at and determine different scenarios that involve estimating the demand of a product when certain variables are put into place for economic performance. Economic performance is one of the major goals of any company. This involves important decisions to optimize the allocation of cash resources. The objectives of any organization can be measured as effectiveness or as efficiency (Fechete & Nedelcu, 2014). Effectiveness is the extent to which objectives have been met where as efficiency is the extent to which objectives have been achieved in the available resources. In this paper, the elasticities of demand will be looked at in great detail. The elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. One important piece of information to know while determining the elasticities is that if the absolute value of elasticity is less than one, that the determines that the demand is inelastic. In that case, a business would potentially lose revenue if they cut their prices. However, if the absolute value of elasticity is greater than one, then the demand is price elastic. If a business is elastic, that means that they would increase their market share and revenue if prices were cut.
Demand Estimation
1. Compute the elasticities for each independent variable.
A leading brand of low-calorie, frozen microwavable food estimates the following demand equation for its product using data from 26 supermarkets around the country for the month of April. The following is a regression equation for the demand for a product:
QD = - 5200 - 42P + 20PX + 5.2I + .20A + .25M
(2.002) (17.5) (6.2) (2.5) (0.09) (0.21)
R2 = 0.55 n = 26 F = 4.88
Let us assume the following values for the...