QD = 20,000 – 10P + 1500A + 5PX + 10 I
Since R2 is considerable high, the model explains the demand quite well. Putting the values of P, A, Px and I in the above equation, we get, Converting all price into dollars, we get,
QD = 20,000 – (10×8000) + (1500×64) + (5×9000) + (10×5000) = 131000
Now, own price elasticity (ep) = ×
= -10, P = 8000, Q = 131000
Own Price elasticity (ep) = – 10 × = – 0.61 (approx.)
Cross price elasticity (exy) = ×
= 5, Px = 9000, Q = 131000
Cross price elasticity (exy) = 5 × = 0.34 (approx.)
Income elasticity (eI) = ×
= 10, I = 5000, Q = 131000
Income elasticity (eI) = 10 × = 0.38 (approx.)
Advertisement elasticity (eA) = ×
= 1500, A = 64, Q = 131000
Advertisement elasticity (eA) = 1500 × = 0.73 (approx.)
From the above results, we can see that the own price elasticity is – 0.61. Thus the demand for the low-calorie microwavable food is inelastic in nature. This implies that an increase in the price of the food leads to the fall of the quantity demanded by less than proportionate amount. Income elasticity of the good calculated is 0.38. This implies that the good selected is normal good. The cross price elasticity is 0.34. Therefore the two goods are almost substitute goods. Finally, coming to the advertisement elasticity, we can see that the advertisement elasticity is 0.73. Thus advertisement has an important impact on the sales of the product.
Since price elasticity is less than 1, total revenue will fall if price falls. Moreover the cross price elasticity of the product is almost close to zero. So, if the firm will never lower its price to increase its market share.
i) The demand curve s drawn below:
ii) At these prices there is always an excess supply. Thus market forces cannot determine the equilibrium.
iii) The factors can influence demand and supply are:
Demand – Advertisement, Income, price of the competitor’s product, etc. Supply – technological improvement, supply shocks, etc.
Increase in advertisement expenditure can increase the demand this will shift the demand curve rightward.
Similarly any reduction in advertisement expenditure will shift the demand curve leftward. Similarly, a rise in per capita income will shift the demand curve rightward and viceversa. Now, the supply curve can shift rightward if there is any improvement in the technology. On the other hand any supply shock can shift the supply curve leftward.
Varian, H. R. (2011). Intermediate Microeconomics: A Modern Approach (8th ed.). NY: Norton Walter Nicholson, Christopher Snyder (2012). Microeconomic Theory: Basic Principles and Extensions (11th ed.). USA: Cengage Learning TR Jain, VK Ohri (2010). Introductory Microeconomics and Macroeconomics (7th ed.). India: V.K.Publications