Problem I. Looking at demand for Ground Beef a grocery store manager realizes the following:

– Price Elasticity of demand is 1.45

– Cross Price Elasticity with Beef Stew is -0.6 (%change in GB/%change in price of Beef Stew)

– Income Elasticity of Demand if 0.4

a. What is the best pricing decision she can make?

b. If she decides to decrease the price of Ground Beef by %15 and the sale volume for Ground Beef per day is $4,500.00 how much the monthly revenue for Ground Beef sales will change for a 30 day month?

c. If she decides to decrease the price of Ground Beef by %10. How much does the daily revenue generated by Ground Beef sales increase per day? Estimate how much revenue this store will gain or lose in Beef Stew sales because of this change.

d. Is Ground Beef a normal product? Why?

Problem II. What is the best pricing strategy when you are selling an elastic product in a competitive market?

– How do you identify proper periods for sale?

– Will you always decrease the price?

Problem III. We have estimated the demand for a swim suites during the summer. Product 1 is sun screen and product 2 is gym shorts. The following table reports the coefficient estimations and their standard deviations for Price of Product 1 (P_Prod1), Price of Product 2 (P_Prod2), Income, Price of Product (P_Prod) and Temperature.

Demand Estimation

Coeff Std t-Stat

P_Product -5.8 2.1

Income 1.2 0.44

P_Prod1 -0.85 1.5

P_Prod2 1.45 0.39

Temperature (‘F) 0.75 0.24

R2 = .9112

Based on this table answer the following .

a. Please estimate t-statistics for each coefficient.

b. Which parameter is significant enough to be used in your estimations and forecast?

c. Based on R2 is this model is acceptable overall?

d. For one degree Fahrenheit increase in temperature how many swim suits will be demanded if initially the quantity demanded was 10,000?

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