Bus 640 - Consumer Demand Analysis and Estimation Applied Problems

Consumer Demand Analysis and Estimation Applied Problems

Kecia Neely

BUS/640

July 23, 2017

Zhimin Huang, Ph.D

Consumer Demand Analysis and Estimation Applied Problems

Problem 1: 

Patricia is researching venues for a restaurant business. She is evaluating three major attributes that she considers important in her choice: taste, location, and price. The value she places on each attribute, however, differs per what type of restaurant she is going to start. If she opens a restaurant in a suburban area of Los Angeles, then taste is the most important attribute, three times as important as location, and two times as important as price. If she opens a restaurant in the Los Angeles metropolitan area, then location becomes three times as important as taste and two times as important as price. She is considering two venues, respectively, a steak restaurant and a pizza restaurant, both of which are priced the same. She has rated each attribute on a scale of 1 to 100 for each of the two different types of restaurants.

Attribute                Steak Restaurant                Pizza Restaurant
[pic 1]    Taste                                80                                70

Location                        55                                80

Price                                65                                50


Show all your calculations and processes. Describe your answer for each question in complete sentences.

1. Which of the two options should Patricia pursue if she wants to open a restaurant in a suburban area of Los Angeles? Calculate the total expected utility from each restaurant option and compare. Graph is not required. Describe your answer, and show your calculations.

Solution

If Patricia wants to open a restaurant in suburban area of Los Angeles, then taste is most important attribute with a weightage of 3 times as much as location and 2 times of price.

So, if we give weight of 1 to Taste,

Weight of Location = 1/3

Weight of Price = 1/2

Expected utility from Steak restaurant = (1*80 + 1/3*55 + ½*65) / (1+1/3 +1/2) = 71.36

Expected utility from Pizza restaurant = (1*70 + 1/3*80 + ½*50) / (1+1/3 +1/2) = 66.36

As the total utility from Steak restaurant is more, so Patricia should open a steak restaurant in the sub urban area

1. Which of the two options should she pick if she plans to open a restaurant in the Los Angeles metropolitan area? Describe your answer, and show your calculations.

Solution

If Patricia wants to open a restaurant in suburban area of Los Angeles, then location is most important attribute with a weightage of 3 times as much as taste and 2 times of price.

So, if we give weight of 1 to location,

Weight of taste = 1/3

Weight of Price = 1/2

Expected utility from Steak restaurant = (1/3*80 + 1*55 + ½*65) / (1+1/3 +1/2) = 62.2

Expected utility from Pizza restaurant = (1/3*70 + 1*80 + ½*50) / (1+1/3 +1/2) = 70

As the total utility from Steak restaurant is more, so Patricia should open a pizza restaurant in the metropolitan area

1. Which option should she pursue if the probability of finding a restaurant venue in a suburban area can be reliably estimated as 0.7 and in a metropolitan area as 0.3? Describe your reasoning and show your calculations.

Solution

If the probability of finding a restaurant venue in suburban area is 0.7 and metropolitan area is 0.3, she should choose steak restaurant in suburban area, as the expected utility will be 0.7*71.36 = 49.95 which is more than that of metropolitan area which is 0.3*70 = 21

1. Provide a description of a scenario in which this kind of decision between two choices, based on weighing their underlying attributes, applies in the “real-world” business setting. Furthermore, what are the benefits and drawbacks, if any, to this method of decision making?

Solution

In the real-world business setting this kind of decision making between two choices is present when a company wants to setup its factory or McDonald wants to open a restaurant and is confused between two locations or whether to have a drive away of dine in type of restaurant.

Benefits:

• Easy way to determine the best option based on future scenario expectations
• More quantitative than qualitative

Drawbacks:

• Sometimes the weights assigned to each factor may not be accurate as these are assigned based on experiences
• Sometime external forces which are not accounted for may lead to diverse results

Problem 2: 

The demand function for Newton’s Donuts has been estimated as follows:

Qx = -14 – 54Px + 45Py + 0.62Ax

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

Show all your calculations and processes. Describe your answer for each question in complete sentences, whenever it is necessary.