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ECON 625 Managerial Economics Problem Set 3

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ECON 625 Managerial Economics Problem Set 3 1) Questions 1 through 5 are based on the following scenario (adapted from Chapter 5 demand estimation question number 3, p.163) The maker of a leading brand of low-calorie microwavable food estimated the following demand equation for its product using data from 26 supermarkets around the country for the month of April: Q = -5,200 – 42P + 20Px + 5.2l + 0.20A + 0.25M (2.002) (17.5) (6.2) (2.5) (0.09) (0.21) R2 = 0.55 n = 26 F = 4.88 Assume the following values for the independent variables: Q = Quantity sold per month P (in cents) = Price of the product = 500 Px (in cents) = Price of leading competitor’s product = 600 I (in dollars) = Per capita income of the standard metropolitan statistical area (SMSA) in which the supermarket is located = 5,500 A (in dollars) = Monthly advertising expenditure = 10,000 M = Number of microwave ovens sold in the SMSA in which the supermarket is located = 5,000 Calculate the quantity using the given values for the independent variables. 2) Refer to question 1. Calculate the price elasticity of demand. Hint: Use the point elasticity method described on page 72. A numeric example is demonstrated in the second paragraph on that page. 3) Based on the price elasticity of demand, do you think that this firm should cut its price to increase its market share? No, demand is inelastic so cutting price would reduce revenue. No, demand is elastic so cutting price would reduce revenue. Yes, demand is inelastic so cutting price would increase revenue. **Yes, demand is elastic so cutting price would increase revenue. 4) Using the information in question 1, compute the income elasticity.   5) Based on the price elasticity of income, do you think that this company would be extremely concerned about the impact of a recession on its sales? Yes, income elasticity is relatively high, so a recession (with lower income) would likely reduce sales. Yes, income elasticity is relatively low, so a recession (with lower income) would likely reduce sales. No, income elasticity is relatively high, so a recession would not have a large impact on sales. No, income elasticity is relatively low, so a recession would not have a large impact on sales. 6) What proportion of the variation in sales is explained by the independent variables in question 1? 7) 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. Forecast annual sales. Enter your response as a whole number without the dollar sign. 8) What will be the new sales forecast if the competitor lowers its price to $32? 9) 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.) 10) 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? Enter your answer as whole numbers. 11) The Ocean Pacific fleet has just decided to use a pole-and-line method of fishing instead of gill netting to catch tuna. The latter method involves the use of miles of nets strung out across the ocean and therefore entraps other sea creatures besides tuna (e.g. porpoises, sea turtl

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