Assignment Week 2_Consumer Demand Analysis & Estimation

Week 2 Assignment

Consumer Demand Analysis and Estimation Applied Problems Kimberly Fears Bus 640: Managerial Economics

Professor John Sellers November 11, 2013

Assignment Week 2_Consumer Demand Analysis & Estimation Patricia would like to open a restaurant and is currently researching venues. She is evaluating three major attributes that she considers important in her decision. These choices include taste, location and price. The value of these attributes are important based on the locations in Los Angeles, which she is considering either the suburban or metropolitan areas as well as the type of restaurant she is planning to open. Patricia rated each attribute on a scale of 1 to 100. Attribute Taste Location Price Steak Restaurant 80 55 65 Pizza Restaurant 70 80 50

If she opens either of the restaurants in a suburban part of Los Angeles, then taste is the most important attribute, at three times as important as location (3l) and two times as important as price (2p). If either restaurant is opened in the metropolitan part of Los Angeles then location becomes three times as important as taste (3t) and two times as important as price (2p). The price to open either restaurant is the same. Attribute Steak Pizza Taste = t 80 70 Location = l 55 80 Price = p 65 50 Los Angeles Suburban t=3l; t=2p Los Angeles Metropolitan L=3t; l-2p The calculation to determine the expected utility or EU if the restaurant is opened in Suburban LA is: Los Angeles Suburban t=3l; t=2p Steak 80+1/3*55+1/2*65 130.8333333 Pizza 70+1/3*80+1/2*50 121.6666667 Difference 9.166666667 The calculation to determine the expected utility (EU) if the restaurant is opened in Metropolitan LA is Los Angeles Metropolitan L=3t; l=2p Steak 55+1/3*80+1/2*65 114.1666667 Pizza 80+1/3*70+1/2*50 128.3333333 Difference 14.16666667

Assignment Week 2_Consumer Demand Analysis & Estimation a. Patricia should open the steak restaurant in suburban Los Angeles because it has the highest EU at 130.83. The EU for the pizza in the same location was only 121.67 a difference of 9.17. b. If she chose the metropolitan location the pizza restaurant would be the better choice with a EU of 128.33. The EU for the steak restaurant in the same location was 114.17, a difference of 14.17. c. The expected utility if the probability of finding a venue in the suburban area is estimated as 0.7. Based on the calculation below the best option is still the steak restaurant with an estimate of 122.27. Los Angeles Suburban Steak Pizza

130.8333333/(1+0.07) 121.6666667/(1+0.07) Difference

122.27 113.71 8.57

The expected utility if the probability of finding a venue in the metropolitan area is estimated as 0.3. Based on the calculation below the best option is the pizza restaurant with an estimate of 124.60. Los Angeles Metropolitan Steak Pizza

114.1666667/(1+0.03) 128.3333333/(1+0.03) Difference

110.84 124.60 13.75

Managers can influence the purchasing behavior of consumers by adjusting one or more of the variables that enter the consumers decision purchasing process (Douglas, 2012). Patricias decision to open a restaurant in either Los Angeles locations she must consider the uncontrollable variables including consumer income levels and changes in competitive behavior by a potential rival (Douglas, 2012).

Assignment Week 2_Consumer Demand Analysis & Estimation 2. The demand function for Newton Donuts has been estimated as follows: Qx = -14 54Px + 45Py + 0.62Ax

Where Qx represents thousands of donuts; Px is the price per donuts; Py is the average price per donuts of other brands of donuts; and Ax represents thousands of dollars spent advertising Newton Donuts. The current values of the independent variables are Ax=120, Px=0.95, and Py=0.64.

Problem 2 original variable Qx = donuts -14 Px = price per Newton brand -54 0.95 Py = price per other brand 45 0.64 Ax = advertising dollars 0.62 120 (a) Price elasticity Newton Brand change in demand = = = (b) Price elasticity change in price = ( c) Profit maximizing total revenue total cost total profit (d) advertising new -51.3 28.8 74.40

a. Calculate the price elasticity of demand for Newtons Donuts and explain what it means. b. Derive an expression for the (inverse) demand curve for Newtons Donuts. c. If the cost of producing Newtons Donuts is constant at $0.15 per donuts, should they reduce price and thereafter, sell more donuts (assume profit maximization is the companys goal)? d. Should Newton Donuts spend more on advertising?