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Grading for this assignment will be based on answer quality, logic / organization of the paper, and language and writing skills, using the following rubric.
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Points: 200 |
Assignment 1: Demand Estimation |
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Criteria |
Unacceptable Below 70% F |
Fair 70-79% C |
Proficient 80-89% B |
Exemplary 90-100% A |
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1. Compute the elasticities for each independent variable. Note: Write down all of your calculations. Weight: 15% |
Did not submit or incompletely computed the elasticities for each independent variable. |
Partially computed the elasticities for each independent variable. |
Satisfactorily computed the elasticities for each independent variable. |
Thoroughly computed the elasticities for each independent variable. |
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2. Determine the implications for each of the computed elasticities for the business in terms of short-term and long-term pricing strategies. Provide a rationale in which you cite your results. |
Did not submit or incompletely determined the implications for each of the computed elasticities for the business in terms of short-term and long-term pricing strategies. Did not submit or incompletely provided a rationale in which you cite your results. |
Partially determined the implications for each of the computed elasticities for the business in terms of short-term and long-term pricing strategies. Partially provided a rationale in which you cite your results. |
Satisfactorily determined the implications for each of the computed elasticities for the business in terms of short-term and long-term pricing strategies. Satisfactorily provided a rationale in which you cite your results. |
Thoroughly determined the implications for each of the computed elasticities for the business in terms of short-term and long-term pricing strategies. Thoroughly provided a rationale in which you cite your results. |
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3. Recommend whether you believe that this firm should or should not cut its price to increase its market share. Provide support for your recommendation. Weight: 10% |
Did not submit or incompletely recommended whether you believe that this firm should or should not cut its price to increase its market share. Did not submit or incompletely provided support for your recommendation. |
Partially recommended whether you believe that this firm should or should not cut its price to increase its market share. Partially provided support for your recommendation. |
Satisfactorily recommended whether you believe that this firm should or should not cut its price to increase its market share. Satisfactorily provided support for your recommendation. |
Thoroughly recommended whether you believe that this firm should or should not cut its price to increase its market share. Thoroughly provided support for your recommendation. |
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4a. Assume that all the factors affecting demand in this model remain the same, but that the price has changed. Further assume that the price changes are 100, 200, 300, 400, 500, 600 cents. Plot the demand curve for the firm. Weight: 5% |
Did not submit or incompletely plotted the demand curve for the firm. |
Partially plotted the demand curve for the firm. |
Satisfactorily plotted the demand curve for the firm. |
Thoroughly plotted the demand curve for the firm. |
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4b. Assume that all the factors affecting demand in this model remain the same, but that the price has changed. Further assume that the price changes are 100, 200, 300, 400, 500, 600 cents. Plot the corresponding supply curve on the same graph using the following MC / supply function Q = -7909.89 + 79.1P with the same prices. Weight: 5% |
Did not submit or incompletely plotted the corresponding supply curve on the same graph using the following MC / supply function Q = -7909.89 + 79.1P with the same prices. |
Partially plotted the corresponding supply curve on the same graph using the following MC / supply function Q = -7909.89 + 79.1P with the same prices. |
Satisfactorily plotted the corresponding supply curve on the same graph using the following MC / supply function Q = -7909.89 + 79.1P with the same prices. |
Thoroughly plotted the corresponding supply curve on the same graph using the following MC / supply function Q = -7909.89 + 79.1P with the same prices. |
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4c. Assume that all the factors affecting demand in this model remain the same, but that the price has changed. Further assume that the price changes are 100, 200, 300, 400, 500, 600 cents. Determine the equilibrium price and quantity. Weight: 5% |
Did not submit or incompletely determined the equilibrium price and quantity. |
Partially determined the equilibrium price and quantity. |
Satisfactorily determined the equilibrium price and quantity. |
Thoroughly determined the equilibrium price and quantity. |
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4d. Assume that all the factors affecting demand in this model remain the same, but that the price has changed. Further assume that the price changes are 100, 200, 300, 400, 500, 600 cents. Outline the significant factors that could cause changes in supply and demand for the low-calorie, frozen microwavable food. Determine the primary manner in which both the short-term and the long-term changes in market conditions could impact the demand for, and the supply, of the product. Weight: 10% |
Did not submit or incompletely outlined the significant factors that could cause changes in supply and demand for the low-calorie, frozen microwavable food. Did not submit or incompletely determined the primary manner in which both the short-term and the long-term changes in market conditions could impact the demand for, and the supply, of the product. |
Partially outlined the significant factors that could cause changes in supply and demand for the low-calorie, frozen microwavable food. Partially determined the primary manner in which both the short-term and the long-term changes in market conditions could impact the demand for, and the supply, of the product. |
Satisfactorily outlined the significant factors that could cause changes in supply and demand for the low-calorie, frozen microwavable food. Satisfactorily determined the primary manner in which both the short-term and the long-term changes in market conditions could impact the demand for, and the supply, of the product. |
Thoroughly outlined the significant factors that could cause changes in supply and demand for the low-calorie, frozen microwavable food. Thoroughly determined the primary manner in which both the short-term and the long-term changes in market conditions could impact the demand for, and the supply, of the product. |
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5. Indicate the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves for the low-calorie, frozen microwavable food. Weight: 10% |
Did not submit or incompletely indicated the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves for the low-calorie, frozen microwavable food. |
Partially indicated the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves for the low-calorie, frozen microwavable food. |
Satisfactorily indicated the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves for the low-calorie, frozen microwavable food. |
Thoroughly indicated the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves for the low-calorie, frozen microwavable food. |
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6. 3 references |
No references provided |
Does not meet the required number of references; some or all references poor quality choices. |
Meets number of required references; all references high quality choices. |
Exceeds number of required references; all references high quality choices. |
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7. Writing Mechanics, Grammar, and Formatting |
Serious and persistent errors in grammar, spelling, punctuation, or formatting. |
Partially free of errors in grammar, spelling, punctuation, or formatting. |
Mostly free of errors in grammar, spelling, punctuation, or formatting. |
Error free or almost error free grammar, spelling, punctuation, or formatting. |
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8. Appropriate use of APA in-text citations and
reference section |
Lack of in-text citations and / or lack of reference section. |
In-text citations and references are provided, but they are only partially formatted correctly in APA style. |
Most in-text citations and references are provided, and they are generally formatted correctly in APA style. |
In-text citations and references are error free or almost error free and consistently formatted correctly in APA style. |
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9. Information Literacy / Integration of Sources |
Serious errors in the integration of sources, such as intentional or accidental plagiarism, or failure to use in-text citations. |
Sources are partially integrated using effective techniques of quoting, paraphrasing, and summarizing.
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Sources are mostly integrated using effective techniques of quoting, paraphrasing, and summarizing. |
Sources are consistently integrated using effective techniques of quoting, paraphrasing, and summarizing. |
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10. Clarity and Coherence of Writing |
Information is confusing to the reader and fails to include reasons and evidence that logically support ideas. |
Information is partially clear with minimal reasons and evidence that logically support ideas. |
Information is mostly clear and generally supported with reasons and evidence that logically support ideas.
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Information is provided in a clear, coherent, and consistent manner with reasons and evidence that logically support ideas. |
Graphing Question –
Answer
1. Generate the numbers for
Quantity
Demanded and
and enter them a table.
0 – 10P
0 + 20P
Quantity Supplied
200
0
400
0
0
1000
1200
0
The Market for Corn
Demand 1400.0 1300.0 1200.0 1100.0 1000.0 900.0 800.0 700.0 600.0 500.0 60.0 70.0 80.0 90.0 100.0 110.0 120.0 130.0 140.0 150.0 Supply 200.0 400.0 600.0 800.0 1000.0 1200.0 1400.0 1600.0 1800.0 2000.0 60.0 70.0 80.0 90.0 100.0 110.0 120.0 130.0 140.0 150.0 Quantity
Price
2
Demand Estimation
Sample Analytical Problem
The following questions refer to this regression equation. Standard errors are in parentheses.
QD = 15,000 – 10 P + 1500 A + 4 PX + 2 I
(5,234) (2.29) (525) (1.75) (1.5)
R2 = 0.65
N = 120
F = 35.25
Standard error of Y estimate = 565
Q = Quantity demanded
P = Price = 7,000
A = Advertising expense, in thousands = 54
PX = Price of competitor’s product = 8,000
I = Average monthly income = 4,000
1.
Calculate the elasticity for each variable and briefly comment on what information this gives you in each case.
Based on values given above,
QD = 15,000 – 10 (7,000) + 1500 (54) + 4 (8,000) + 2 (4,000) =
= 15,000 – 70,000 + 81,000 + 32,000 + 8,000 = 66,000
Price elasticity = -10(7,000/66,000) = -1.06. Demand is elastic (at this point).
Advertising elasticity = 1500(54/66,000) = 1.23. The product is elastic with respect to advertising; a 1 % increase in advertising expense will lead to a greater than 1 % increase in sales.
Cross elasticity = 4(8000/66,000) = 0.48. Cross elasticity is positive, implying that the products are substitutes, but it is less than 1, suggesting that they are not particularly good substitutes and the competitor’s price has little impact on the firm’s sales.
Income elasticity = 2(4000/66,000) = 0.12. The product is income inelastic; thus it is a normal good (necessity), and is not particularly responsive to income fluctuations.
2.
Calculate t-statistics for each variable and explain what this tells you.
Price: 10/2.29 = 4.37
Advertising: 1500/525 = 2.86
Competitor’s price: 4/1.75 = 2.29
Income: 2/1.5 = 1.33
All variables are statistically significant with the exception of income. Thus, we can conclude that the other variables do have an impact on the quantity demanded of this product.
3.
How is the R2 value calculated and what information does it give you?
R2 = RSS/TSS = 1 – (ESS/TSS), where
TSS = sum of squared deviations of the sample values of Y from their mean, RSS = sum of squared deviations of the estimated values from their mean, and
ESS = sum of the squared deviations of the sample values from their estimated values
The R2 value tells you what percentage of the variations in the dependent variable is explained by variation in the independent variables, or the “goodness of fit” of the equation. In this case, 65 % of the variation in the quantity demanded is explained by variation in the independent variables.
4. How would you evaluate the quality of this equation overall? Do you have any concerns? Explain.
The overall equation is significant, as shown by the F-test. The R2 value is reasonably high. One variable is not significant. It might be desirable to re-estimate the equation without it. The sample is sufficiently large (N = 120). There are no significant concerns.
5. Should this firm be concerned if macroeconomic forecasters predict a recession? Explain.
Based on income elasticity from this equation (0.12), no. The good is income inelastic, so a recession should not cause a significant decrease in sales. Note also that income is not statistically significant in this equation, making it even less of a concern.
6. The firm is considering changing its price to $9,000. Predict the quantity demanded at that price, all other things equal.
At a price of $9,000, the point estimate of quantity demanded would be
QD = 15,000 – 10 (9,000) + 1500 (54) + 4 (8,000) + 2 (4,000) =
= 15,000 – 90,000 + 81,000 + 32,000 + 8,000 = 46,000
7. How could a manager use the information contained in this regression equation?
A manager might note that the demand is elastic, and thus that sales might respond to price decrease. Likewise, sales should respond to increases in advertising. Sales are less likely to be impacted by income changes or by changes in the price of the competitor’s product. The equation could be used to forecast expected sales based on changes in one or more variables. The equation could be used to help in coordinating production plans or with other parts of the firm.
Hints for Assignment 1
Please review the following files posted in Week 2 Instructor Insights.
1.
Demand Estimation – Sample Analytical Problem
a. It shows how elasticities are calculated for the independent variables in the regression equation.
b. It also shows how you can interpret the elasticities.
2.
Graphing Supply and Demand Instructions
and
Graphing Supply and Demand Sample Problem
a. These files will show you how to graph in Excel.
Under Instructor Insights, you can find additional material on demand estimation and using Excel.
IMPORTANT!!! You should use Option 1. Ignore Option 2.
Question 1:
You should compute the elasticity for each independent variable as shown in the sample analytical problem mentioned above.
Note: Do not convert the cents into dollars.
Question 2:
Interpret the elasticities as shown in the sample analytical problem.
Question 3:
You should look at the price elasticity of demand to answer this question. If the absolute value of elasticity is smaller than 1, the demand is inelastic, and the company would lose revenue if it cuts its price. If the absolute value of elasticity is bigger than 1, then the demand is price elastic and the company would increase its market share and its revenue if it cuts the price.
Question 4:
a. The supply function is given to you. It is Q = -7909.89 + 79.0989P. You have to calculate the demand function. The regression equation is the demand function, but you have to keep all factors that affect the demand constant, except for the price. So, you can plug in the provided values of Px, I, A, and M in the regression equation. Thus, you will derive the demand function, which shows the relationship between quantity demanded and price assuming that nothing else changes.
Here is and example based on the demand equation in the sample analytical problem.
QD = 15,000 – 10 P + 1500 A + 4 PX + 2 I
Q = Quantity demanded
P = Price = 7,000
A = Advertising expense, in thousands = 54
PX = Price of competitor’s product = 8,000
I = Average monthly income = 4,000
QD = 15,000 – 10 P + 1500 (54) + 4 (8,000) + 2 (4,000)
QD = 15,000 – 10 P + 81,000 + 32,000+ 8,000
QD = 136,000 – 10 P (this is the demand function)
Follow the graphing instructions to plot the demand curve.
· Enter in one column the prices 100, 200,…,600
· Calculate the quantity demanded at each price using the demand function in a second column.
· Then, graph the demand curve using the graphing instructions.
b. Use the supply function and follow the instructions to graph it.
c. The equilibrium point would be the point of intersection between demand and supply curves. The equilibrium price corresponding to this point is on the vertical axis, and the equilibrium quantity corresponding to this equilibrium point is on the horizontal axis.
d. To answer this question, review the demand and supply factors.
Question 5:
Consider the most important factors other than the price of the product that can affect the demand and supply of low-calorie microwavable food. You can do some research on the demand and supply conditions in this market.
Graphing Supply and Demand
Instructions
Graphing With Excel 2003
1. Enter the data for Price, Quantity Demanded, and Quantity Supplied in three columns anywhere in the spreadsheet.
2. Click on the Chart Wizard icon
3. Select XY (Scatter) and select a chart subtype with lines. Click Next.
4. Click on Series tab, then click on add. You will see in the series box Series 1 added. Type the name of the series – Demand. Then in X values box, enter the cell range for Quantity Demanded. In Y value box, enter the cell range for Price. You will see your Demand curve appear on the graph. Next, add another series for Supply. Name it Supply. In X values box enter the cell range for Quantity Supplied. In Y values box, enter the cell range for Price. You will see your Supply curve appear on the graph. Click next.
5. Enter your chart title, for example, “The Market for Pizza”. In the value (X) axis box, type Quantity; in the value (Y) axis box, type Price.
6. Click Next and then Finish.
Graphing With Excel 2007
1. Enter the data for price, quantity demanded, and quantity supplied in three columns anywhere in the spreadsheet.
2. Click on
Insert tab
3. From the
Chart Types
select
XY (Scatter) and then
Scatter with Straight Lines
. Click OK.
4. Click the
Select Data
icon. Under
Legend Entries (Series)
click on add. You will see in the series box
Series 1 added. Type the name of the series – Demand. Then in
Series X values box
, enter the cell range for quantity demanded (x values are measured on the horizontal axis). In
Series Y value box
, enter the cell range for price (y values are measured on the vertical axis). Click OK. You will see the demand curve appear on the graph. Next, add another series for Supply. Name it Supply. In
Series X values box
enter the cell range for quantity supplied. In
Series Y value box
, enter the cell range for price. You will see the Supply curve appear on the graph. Click OK.
5. When you click on inside the graph, you may select the chart layout, enter the chart title, and label the horizontal and vertical axis. For example, you can enter the title “The Market for Pizza”. In the value (X) axis box, type Quantity; in the value (Y) axis box, type Price.
Assignment 1: Demand Estimation
Due Week 3 and worth 200 points
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.
For a refresher on independent and dependent variables, please go to Sophia’s Website and review the Independent and Dependent Variables tutorial, located at
http://www.sophia.org/tutorials/independent-and-dependent-variables–3
.
Option 1
Note: The following is a regression equation. Standard errors are in parentheses for the demand for widgets.
QD = – 5200 – 42P + 20PX + 5.2I + 0.20A + 0.25M
(2.002) (17.5) (6.2) (2.5) (0.09) (0.21)
R2 = 0.55 n = 26 F = 4.88
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 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 in which the
supermarkets are located = 5,000
Write a four to six (4-6) page paper in which you:
1. Compute the elasticities for each independent variable. Note: Write down all of your calculations.
2. Determine the implications for each of the computed elasticities for the business in terms of short-term and long-term pricing strategies. Provide a rationale in which you cite your results.
3. Recommend whether you believe that this firm should or should not cut its price to increase its market share. Provide support for your recommendation.
4. Assume that all the factors affecting demand in this model remain the same, but that the price has changed. Further assume that the price changes are 100, 200, 300, 400, 500, 600 cents.
a. Plot the demand curve for the firm.
b. Plot the corresponding supply curve on the same graph using the following MC / supply function Q = -7909.89 + 79.1P with the same prices.
c. Determine the equilibrium price and quantity.
d. Outline the significant factors that could cause changes in supply and demand for the low-calorie, frozen microwavable food. Determine the primary manner in which both the short-term and the long-term changes in market conditions could impact the demand for, and the supply, of the product.
5. Indicate the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves for the low-calorie, frozen microwavable food.
6. Use at least three (3) quality academic resources in this assignment. Note: Wikipedia does not qualify as an academic resource.
Your assignment must follow these formatting requirements:
· Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
· Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.
The specific course learning outcomes associated with this assignment are:
· Analyze how production and cost functions in the short run and long run affect the strategy of individual firms.
· Apply the concepts of supply and demand to determine the impact of changes in market conditions in the short run and long run, and the economic impact on a company’s operations.
· Use technology and information resources to research issues in managerial economics and globalization.
· Write clearly and concisely about managerial economics and globalization using proper writing mechanics.
