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 = -5200 - 42P + 20PX + 5.2I + 0.20A + 0.25M
P (in cents) = Q/P = −42
PX (in cents) = Q/PX = 20
I (in dollars) = Q/I = 5.2
A (in dollars) = Q/A = 0.20
M = Q/M = 0.25
The values given for the independent variables. The quantity demanded is Q = -5200 - 42(5) + 20(6) + 5.2(5500) + 0.20(10000) + 0.25(5000) = 26,560
The price elasticity of demand.
Ed = − Q/P × P/Q = − (-42) × 5/26,560 = 0.0079
The cross-price elasticity of demand.
EPX = Q/PX × PX/Q = 20 × 6/26,560 = 0.0045
The income elasticity of demand.
EI = Q/I × I/Q = 5.2 × 5500/26,560 = 1.0768
The demand elasticity for A.
EA = Q/A × A/Q = 0.20 × 10,000/26,560 = 0.0753
The demand elasticity for M.
EM = Q/M × M/Q = 0.25 × 5,000/26,560 = 0.0451
The price elasticity of demand is 0.0079 for example inelastic. This means the total expenditure of the consumer is directly related with price. Since a rise in price will increase the total revenue of the firm, the firm's pricing strategy is to increase the price.
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 = Q = -2000 - 100P + 25PX + 10I + 15A
P (in cents) = Q/P = −100
PX (in cents) = Q/PX = 25
I (in dollars) = Q/I = 10
A (in dollars) = Q/A = 15
The values given for the independent variables. The quantity demanded is Q = -2000 - 100(2) + 25(3) + 10(5000) + 15(640) = 57,475
The price elasticity of demand.
Ed = − Q/P × P/Q = − (-100) × 2/57475 = 0.0035
The cross-price elasticity of demand.
EPX = Q/PX × PX/Q = 25 × 3/57,475 = 0.0013
The income elasticity of demand.
EI = Q/I × I/Q = 10 × 5000/57,475 = 0.8699
The demand elasticity for A.
EA = Q/A × A/Q = 15 × 640/57,475 = 0.1670
1. Determine the implications for each of the computed elasticities for the business in terms of short-term and long-term pricing strategies. 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.