Consumer Demand Analysis and Estimation Applied Problems

Week 2: Consumer Demand Analysis and Estimation Applied Problems

Latasha Simms

BUS 640: Managerial Economics

Prof. Chavarria

11 June 2018

Patricia is collecting date for a space for her new business restaurant. She has three major attribute that she believes that would make her business successful. What she is considering as her three attributes is location, price, and taste. Depending on the kind of restaurant she open, the value of each attribute will change. If open in the 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. Patricia decide on two restaurants, steak and pizza but both restaurant will have the same price. The value of each attribute range from 1 to 100.

Problem 1

1.  Which of the two options should Patricia pursue if she wants to open a restaurant in a suburban area of Los Angeles? Giving the calculation.

 Steak restaurant (T X 80 + L X 55 + P X 65) / (T + L + P)

(1 X 80 + 1/3 X 55 + ½  X 65) / (1 + 1/3 + ½)

(80 + 18.33 + 32.50) / (1.83)

130.83 / 1.83

71.49

Pizza restaurant (T X 70 + L X 80 + P X 50) / (T + L + P)

(1 X 70 + 1/3 X 80 + ½  X 50) / (1 + 1/3 + ½)

(70 + 26.66 + 25) / 1.83

121.66 / 1.83

66.48

Out of the two options, Patricia should pursue opening the pizza restaurant in the suburban area of Los Angeles.

1. Which of the two options should she pick if she plans to open a restaurant in the Los Angeles metropolitan area?

Steak restaurant (T X 80 + L X 55 + P X 65) / (T + L + P)

(1/3 X 80 + 1 X 55 + ½  X 65) / (1/3 + 1 + ½)

(26.66 + 55 + 32.50) / (1.83)

114.16 / 1.83

62.38

Pizza restaurant (T X 70 + L X 80 + P X 50) / (T + L + P)

(1/3 X 70 + 1 X 80 + ½  X 50) / (1/3 + 1 + ½)

(23.33 + 80 + 25) / 1.83

128.33 / 1.83

70.12

Out of the two options, Patricia should pursue opening the steak restaurant in the Los Angeles 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?

Steak restaurant = 71.49 X 0.7

  = 50.04

Pizza restaurant = 66.48 X 0.3

= 19.94

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?

Problem 2

Qx = -14 – 54Px + 45Py + 0.62Ax

Qx = Thousands of donuts

Px = Price per donut = .95

Py = Average price of other brands of donuts = .64

Ax = Thousands of dollars spent on advertising Newton’s Donuts = 120

Qx = -14 – 54(.95) + 45(.64) + 0.62(120)

Qx = -14 – 51.3 + 28.8 + 74.4

Qx = 37.9

1. Calculate the price elasticity of demand for Newton’s Donuts and describe what it means.

Price Elasticity of Demand (PED) = 0.95 / 37.9 X -54

= 0.02 X -54

= -1.35

Since the PED is -1.35 which is last than 1, the PED is inelasticity.

1. Derive an expression for the inverse demand curve for Newton’s Donuts.

The inverse demand curve function is Px = f (Qx)