MANAGERIAL ECONOMICS (ECO404)
ASSIGNMENT NO. 1
DUE DATE: 22 NOVEMBER 2012
Mr. Ahmad starts his business by opening a fast food restaurant named ABC chicken burgers. He has his competitor named XYZ chicken burgers in the same locality. Along with this business, he is also studying managerial economics in a private institute that’s why he realizes the importance of elasticity in the business field. He knows that elasticity plays very important role in business decision making. He wants to apply the knowledge of managerial economics in his business for profit maximization that’s why he is eager to estimate various types of elasticity for his product with respect to the factors that affect the demand of his product like price, income, price of substitutes, price of compliments, advertising etc.
For this purpose, he collects the data and estimates the following regression equation:
QABC = 1.8 - 5.2PABC + 0.9Y + 2.01PXYZ – 0.64PC + 1.25A
QABC = Sales of ABC burgers per year
PABC = Price of ABC burgers in rupees
Y = Disposable personal income in rupees per year
PXYZ = Price of the competitive XYZ burgers in rupees
PC = Price of chicken
A = Advertising expenditures for ABC burgers in rupees per year
If PABC = Rs.90, Y = Rs.10, 000, PXYZ = Rs.85, PC = Rs.130, and A = Rs.100, then calculate:
a) Sales of ABC burgers per year
b) Price elasticity of demand (EP) for ABC burgers
c) Income elasticity of demand (EY)for ABC burgers
d) Cross price elasticity of demand (EABC.XYZ) for ABC burgers with respect to the price of XYZ burgers
e) Cross price elasticity of demand (EABC.C) for ABC burgers with respect to the price of chicken
f) Elasticity of demand (EA) with respect to the advertising expenditures
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