1. Advertisement Elasticity 0.20, A = 10,000, QD

1.      Compute
all the elasticities for each independent variable. 

Option 1 

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Quantity
Demanded= (-5200) -42 (500) +20 (600) +5.2 (5,500) +.20 (10,000) +.25 (5,000)

                                          = (-5200)
-21000 + 12000 + 28600 + 2000 + 1250 = 17650

                                                                              =
17650

Cross
Price Elasticity

= 20, Px = 600, QD = 17650

= 20 (600 / 17650)

= 0.68, means there are substitute products

Income
Elasticity

5.2, I = 5500, QD = 17650

= 5.2 (5500 / 17650)

= 1.62

Advertisement
Elasticity

0.20, A = 10,000, QD = 17650

0.20 (10000 / 17650)

= 0.11

Supply
Elasticity

0.25, M=5000, QD= 17650

.25 (5000 / 17650)

= 0.07

2.      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.

Elasticity
is a measure of a variable’s sensitivity to a change in another variable.  Elasticity refers to the degree to which
individuals, consumers, or producers change their demand or the amount supplied
in response to price or income changes.  It
is mainly used to retrieve the change in consumer demand as a result of a
change in a good or service’s price.

Ø 
Price of the product elasticity = – 42
(500 / 17,650) = -1.19. The price of the microwaveable food product is elastic,
implicating that the price of the product will affect the demand. As the price
of the product increases, the demand for the frozen microwaveable food will
decrease as well as if the price of the microwaveable food decreases, the
demand for them will increase.

Cross elasticity of demand is an
economic concept that measures the responsiveness in the quantity demand of one
good when a change in price takes place in another good.

Ø 
Cross elasticity = 20 (600 / 17,650)
= .68. The cross elasticity is positive, suggesting that they are substitute
products. The elasticity is less than 1, this means that they are not good
substitutes and the competitor’s price has a very small impact to the product
sales.

Ø 
Per capita Income elasticity = 5.2 (5,500
/ 17,650) = 1.62. The product is income elastic. This would indicate that the
product is a luxury product and will be responsive to income variations.

Ø 
Advertising elasticity = .20 (10,000
/ 17,650) = .11. The product is inelastic with respect to advertising. An
increase in advertising will have a very small effect on product sales.

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

Setting
the right pricing levels is important because it affects sales volumes and
profits.  Some manufacturers set limits
on what retailers can sell their products for, including both the high and low
selling price.  In order to increase
market share, the company should cut its prices. Seeing the price elasticity of
a product will give you incite on whether or not a firm should increase or
decrease their cost. Seeing the price elasticity will also show the firm
whether or not it will have an effect on the demand of a product. According to
the price elasticity of the microwavable food, the price elasticity of 1.19 and
the change in price is going to have an effect on demand for the product. If
the price were to decrease, then there would be an increase in demand.

4.      Assume
that all the factors affecting demand in this model remain the same, but that
the price has changed.  Further assume
that the price changes are 100, 200, 300, 400, 500, 600 cents.

a.      Plot the
demand curve for the firm.

QD = – 5200 – 42P + 20 (600) + 5.2 (5500) + 0.2
(10000) +.25 (5000)

17650 – 42P

P + 17650 / 42 – Q / 42

b.      Plot the
corresponding supply curve on the same graph using the following MC / supply
function Q = -7909.89 + 79.1P with the same prices.

Q = – 7909.89 + 79.0989P

P = 17650 / 42 – Q / 42

c.       Determine
the equilibrium price and quantity.

QD = QS

17650 – 42P =  
– 7909.89 + 79.0989P

P = – 34989.56 / 121.0989

P = 288.93 / 2.88 Dollars

Q = – 7909.89 +79.0989 (288.93)

= 14944.15 (approximately 14944 units)

d.      Outline
the significant factors that could cause changes in supply and demand for the
low-calorie, frozen microwavable food.  Determine
the primary manner in which both the short-term and the long-term changes in
market conditions could impact the demand for, and the supply, of the product.

The cost of food and cost of production of the
product could cause changes in supply and demand. As stated previously, if the
firm lowers the price of their products, demand would increase, but if
production costs increase, then supply deceases.

5.      Indicate
the crucial factors that could cause rightward shifts and leftward shifts of
the demand and supply curves for the low-calorie, frozen microwavable food.

According
to the law of demand if all other factors remain equal, the higher the price of
the goods the less people will demand those goods (Heakal, 2014). In lamest
terms the higher the price the lower the quantity demanded. The firm will not
have as many buyers if they were to raise their price of their microwave foods.
The demand and supply curve may shift left do to negative product reviews, if
consumers see that product has negative reviews they may have second thoughts
about purchasing the product. For example, maybe there was a study to show that
the low calorie microwave food causes silent strokes, this may reduce demand
and shift the curve. New competition can also cause the demand curve to shift
left as consumers stop buying one product to try a new one (Sarokin).  The demand and supply curve may shift right
due to a rise in income, a rise in price of a substitute or a fall in price of
a counterpart (Shifts in Demand, 2015).