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Mbav 6053-05e-2 Economics for Managers - Answer of Question 8 - Full

Mbav 6053-05e-2 Economics for Managers - Answer of Question 8 - Full

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05/09/2014

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Question 8:
The following question refers to this regression equation.QD = 15,000 – 10.P + 1500.A + 4.PX + 2.I,R
2
= 0.65N = 120F = 35.25Where: QD = Quantity demandedP = Price = 7,000A = Advertising expense, in thousands = 54P
X
= price of competitor's product = 8,000I = average monthly income = 4,000Calculate the elasticity for each variable and briefly comment on what information thisgives you in each case.
Answer:
With P = 7,000; A = 54 (in thousand), P
X
= 8000; and I = 4000,We insert these values into the quantity formulation to calculate the quantity demand:QD = 15,000 10(7,000) + 1,500(54) + 4(8,000) + 2(4,000)= 66,000Calculate the elasticity for each variable and briefly comment on what information thisgives us in each case. We use the formula for point elasticity to obtain the elasticitycoefficients:
.
QX
δ  δ  
=
 
1. Price elasticity:
In economics and business studies, the price elasticity of demand (PED or PEoD) is anelasticity that measures the nature and percentage of the relationship between changesin quantity demanded of a good and changes in its price.Replace data from the question, we can calculate E
P
such as:
 
P
7,000E = -10. = -1.0666,000 E
P
<1 but |E
P
| > 1. In absolute term, this occurs when a 1 percent change in pricecauses a change in quantity demand greater. In this case 1% change in price causes achange of 1.06% quantity demanded and the product is a case of relatively elasticdemand.
2. Advertising elasticity:
A
54E = 1,500. = 1.2266,000 Advertising elasticity can be defined as the percentage changes in quantity relative to a1 percent changes in advertising expenses. In case E
A
= 1.22, it means that percentagechange in advertising increase the consumption of the product by 1.22%. This productis elastic to advertising.
3. Price elasticity of competitor's product (Cross elasticity):
X
P
8,000E = 4. = 0.4866,000 In economics, the cross elasticity of demand and cross price elasticity of demandmeasures the responsiveness of the quantity demanded of a good to a change in theprice of another good. It is measured as the percentage change in quantity demandedfor the first good that occurs in response to a percentage change in price of the secondgood.In this case, the cross elasticity is positive; it means that two products are substitutes.Therefore, when the price of one goes up, the quantity demanded of the other will alsoincrease. For example, in response to an increase in the price of carbonated soft drinks,the demand for non-carbonated soft drinks will rise. In the case of perfect substitutes,the cross elasticity of demand is equal to infinity.
 
4. Income elasticity:
I
4,000E = 2. = 0.1266,000 In economics, the income elasticity of demand measures the responsiveness of thequantity demanded of a good to the change in the income of the people demanding thegood. It is calculated as the ratio of the percent change in quantity demanded to thepercent change in income.

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