Imagine that you work for the maker of a leading brand of low-calorie, frozen microwavable food that estimates the following demand equation for its product using data from 26 supermarkets around the country for the month of April. 1. Compute the elasticities for each independent variable.
Option 1
Your supervisor has asked you to compute the elasticities for each independent variable. Assume the following values for the independent variables:
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 …show more content…

However, the elasticity was less than 1, which implies that it is inelastic, and the number of customers going to and fro based on price would not be very significant. For example, if the leading competitor increases their price to 700 cents, quantity demands for this company will increase about 2000, resulting a $10,000 increase in total revenue. Likewise, if the leading competitor lowers the price by 100 cents, this company’s demand will decrease by 2,000 resulting $10,000 loss in total revenue. See Table 2
Table 2. Leading Competitor’s Price Elasticity. PX (Cents) | Elasticity | QD | Revenue | 100 | 0.261 | 7650 | $ 38,250.00 | 200 | 0.415 | 9650 | $ 48,250.00 | 300 | 0.515 | 11650 | $ 58,250.00 | 400 | 0.586 | 13650 | $ 68,250.00 | 500 | 0.639 | 15650 | $ 78,250.00 | 600 | 0.680 | 17650 | $ 88,250.00 | 700 | 0.712 | 19650 | $ 98,250.00 | 800 | 0.739 | 21650 | $ 108,250.00 | 900 | 0.761 | 23650 | $ 118,250.00 | 1000 | 0.780 | 25650 | $ 128,250.00 | 1100 | 0.796 | 27650 | $ 138,250.00 | 1200 | 0.809 | 29650 | $ 148,250.00 |
Income Elasticity was 1.62. This is elastic and implies that the demand will be responsive to the income level of the consumers. A $500 change in the average monthly income of consumers results in a 2600 demand change proportionally. For example, if the aver income of consumers increase by $1000 a month, the