Demand Estimation
First, it is crucial that we calculate the Q. value in order to find the elasticities of the other independent variables. This can be done by plugging in the assigned values for each of the independent variables provided by the problem case study. According to the research, "price elasticity of demand is the percentage change in quantity demanded as a result of a 1% change in price" (Fibich, 2005). Thus, it can be determined with the following equations:
Q= -5,200-42P + 20Px +5.2Y + 0.20A + 0.25M
Q= -5,200-42(500) + 20(600) + 5.2(5,500) + 0.20(10,000) + 0.25(5,000)
Q= 17,650
Price of Product (P)
ED=?P / ?Q x P/Q
=-42 x 500/17,650
Price of Competitor's Product (Px)
ED=?Px / ?Q x Px/Q
=20 x 600/17,650
=0.6798
Per Capita Income (Y)
ED=?Q / ?Y x Y/Q
=5.2 x 5,500 / 17,650
= 1.6203
Monthly Advertising Expenditure (A)
Essentially, cutting the price would immediately increase the demand. However, it would begin to eat away at the organization's supply if done too aggressively. This would ultimately force the company to increase production, which would require investments in production capacity. For more long-term profit potential, price should be set so that the demand can be met long-term as well. Ultimately, the best pricing strategy aims to grow profit potential, but also the consumer base as well (Saunders, 2013). If short-term price cuts forces the inventory out of stock, it may impact the ability to retain and grow consumer base.
Question 3
The firm should only cut its prices if it would…
