Posted: February 28th, 2017

Option 2 Note: The following is a regression equation. Standard errors are in parentheses for the demand for widgets.

QD = -2,000 – 100P + 15A + 25PX + 10I (5,234) (2.29) (525) (1.75) (1.5) R2 = 0.85 n = 120 F = 35.25

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 = 200 cents per 3-pack unit PX (in cents) = Price of leading competitor’s product = 300 cents per 3-pack unit I (in dollars) = Per capita income of the standard metropolitan statistical area (SMSA) in which the supermarkets are located = $5,000 A (in dollars) = Monthly advertising expenditures = $640

Write a four to six (4-6) page paper in which you:

Compute the elasticities for each independent variable. Note: Write down all of your calculations.

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.

Recommend whether you believe that this firm should or should not cut its price to increase its market share. Provide support for your recommendation.

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