August 10, 2014
Dr. Lundondo Mumeka
In this essay I will assume the role as an employee for the maker of a leading brand of low-calorie, frozen microwavable food chain. Using the data from 26 supermarkets around the country for the month of April and the equation data that has been provided to me, I will compute the elasticity for each independent variable as well as determine the implications for each of the computed elasticities for the business in terms of short-term and long-term pricing strategies. Based on these calculations I will recommend whether the firm should or should not cut its price to increase its market share. Lastly, with the understanding of the concept on supply and demand I will discuss crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves, illustrating these shifts using graphs plotting the curves.
Compute the Elasticity for Each Independent Variable
Assume the following values for each independent variable. These values will be used to compute the elasticity for each independent variable for the food chain. The first step in computing these equations will be to convert all price values into dollars, then put the values of P, Px, A, I and M in the above equation.
QD = - 5200 - 42P + 20PX + 5.2I + .20A + .25M
• Q = Quantity demanded of 3-pack units
• P (in cents) = Price of the product = 500 cents per 3-pack unit
• PX (in cents) = Price of leading competitor’s product = 600 cents per 3-pack unit
• I (in dollars) = Per capita income of the standard metropolitan statistical area
• (SMSA) in which the supermarkets are located = $5,500
• A (in dollars) = Monthly advertising expenditures = $10,000
• M = Number of microwave ovens sold in the SMSA where the supermarkets are located = 5,000.
QD = -5200 – (42×5) + (20×6) + (5.2×5500) + (0.20×10000) + (0.25×5000) = 26560
• Own price...