ECO 550 - Managerial Economics and Globalization April 28, 2014 Elasticity Elasticity is defined as the ratio of the relative change of the dependent variable to changes in the independent variable (Dick, 2002). Additionally, it can be said to be the percentage change of one variable given the percentage change in another variable (Boyes, & Melvin, 2012). Price elasticity refers to the responsiveness of the quantity demanded to price changes. It is given by; =
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Demand Estimation Dr. Xiaodong Wu Managerial Economics October 24, 2014 Elastics for Variables As the maker for frozen microwavable food we have been instructed to compute the elasticities for each independent variable. The elasticities are important because they demonstrate the direction and magnitude of change for a given variable (McGuigan, Moyer, Harris, 2014, 2014, p. 73). This data can be used to reflect supply and demand of a product and determine the feasibility of pricing strategies
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the following demand equation for its product using data from 26 supermarkets around the country for the month of April. Below lists two options. 1. Compute the elasticities for each independent variable under both options: Option 1: QD= -5200-42P+20PX+5.2I+.20A+.25M (2.002) (17.5) (6.2) (2.5) (.09) (.21) R2=0.55 n=26 F=4.88 QD=-5200-42(500)+20(600)+5.2(5500)+0.20(10000)+.25(5000)=17,650 sold per month Price Elasticity = -42P/Q= -42*(500/17650) =-1.1898 Income Elasticity = 5.2*(5500/17650)=1
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revenue and profits. Because Pepsico is in an oligopoly market, their products are substitutes for other company’s products, therefore their products have a high and positive cross elasticity of demand. Price elasticity of demand is another component you must understand when considering investing in Pepsico. Price elasticity “is the measure of responsiveness of the quantity of a product demanded to a change in that product’s price” (Ragan, 2013). In order to properly identify whether a
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ECONOMICS Tutorial Questions Question 1: The demand curve for a product is: Q = 6 – 0.4P (a) Draw the demand and MR curves (b) What is the elasticity of demand at P = 10? Use this result to verify the formula: MR = P(1 + 1/e)
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Demand, Supply and Price Market Buyers- households/demanders Suppliers- producers/firms Demand-The ability and willingness to buy specific quantities of good at alternate prices in a given time period Or the desire to buy a product, which is backed up by willingness and ability to pay for the it. • Quantity demanded- the amount of a product that the consumers wish to purchase. • Demand schedule- a table which shows the quantities of a good, a consumer is willing and able to buy at alternate prices
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determined that the price elasticity and the income elasticity of demand for Levi’s jeans are 1.5 and 2 respectively. The supply of jeans is elastic. Are the following statements true or false? Why? a) A 5% increase in the price of jeans will reduce quantity demanded by 10%. The statement claims that a 5% increase in the price of jeans will reduce the quantity demanded by 10%. We can check if the statement is correct by using the formula; Price elasticity of demand = percentage change in
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increase in total revenue, so demand is elastic over this range of prices. b. When P = $4, R = ($4)(5) = $20. When P = $2, R = ($2)(6) = $12. Thus, the price decrease results in an $8 decrease total revenue, so demand is inelastic over this range of prices. c. Recall that total revenue is maximized at the point where demand is unitary elastic. We also know that marginal revenue is zero at this point. For a linear demand curve, marginal revenue lies halfway between the demand curve and the vertical axis
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Microeconomics Chapter 1 1.1 The scarcity principle (also called the no-free-lunch principle). Although we have boundless needs and wants, the resources available to us are limited. Consequently, having more of one good thing usually means having less of another. 1.2 The cost-benefit principle. An individual (or a firm, or a society) should undertake a particular action if, and only if, the extra benefits of undertaking that action are at least as great as the extra costs. 1.3 Economic Surplus is
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Compute the elasticities for each independent variable. Note: Write down all of your calculations. P= 500, M= 5000, A= 10,000, I = 5,500, C=600 QD= - 5200 – 42(500) + 20(600) + 5.2(5500) + 0.20(10000) + 0.25(5000) = 17,650 Price Elasticity (Ep) = (P/Q) (∆Q/∆P) ∆Q/∆P = -42. Price Elasticity (Ep) = (P/Q) (-42) (500/17650) = -1.19 Ec = 20(600/17560) = 0.68 EA= (P/Q) (0.20) (10000/17650) = 0.11 EI = (P/Q) (5.2) (5500/17650) = 1.62 EM = (P/Q) (0.25) (5000/17650) = 0.07 Determine
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