Compare The Cross Price Elasticity Of Demand

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Question 1:
Based on the values given above, demand function is,
Q = -5200 – 42P + 20PX + 5.2I + 0.20A + 0.25M
For the given values of the independent variables, the quantity demanded is,
Q = -5200 – 42(500) + 20(600) + 5.2(5500) + 0.20(10000) + 0.25(5000) = 17,650
Calculate the price elasticity of demand = -42 (500/17650) = -1.1898
Calculate demand elasticity for advertising = 0.20 (10,000/17650) = 0.1133
Calculate the cross-price elasticity of demand = 20 (600/17650) = 0.6798
Calculate the income elasticity of demand = 5.2 (5500/17650) = 1.6203
Calculate the demand elasticity for Microwave = 0.25 (5000/17650) = .0708 Question 2:
The price elasticity of demand is -1.1898, 1 in absolute value (elastic)
This can help marketing departments determine the appropriate amount of advertising in relation to the pricing promotion (McGuigan, pg.78)
Cross elasticity is 0.6798. This product is inelastic to competitor pricing thus they don’t need to worry about competitor pricing. If competitor pricing increases our product demand could increase. Income elasticity is greater than 1 thus elastic. This implies that this good is viewed as luxury and if incomes were to increase it would increase product demand. Unit sales of this item can change based on economic activity (McGuigan, pg. 88).
The demand elasticity for microwave is .0708, inelastic. This variable doesn’t have a direct impact on pricing strategy. This product increases in the areas where the food product is in high demand. Consumers of the product need a microwave to consume the product.
Question 3:
Since a rise in price will increase the overall revenue, this could mean that the company’s strategy is to increase the price. Cutting the price could potentially decrease revenue. Therefore, the firm should not cut its price.
Question

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