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The demand function using multiple linear regression is as follows :-

5024.58-136.62 (Price of Maa Mustard Oil)


+ 117.41 (Price of competitor's products)-
0.2823 (Per capita income of consumers) +
Demand for Maa 7.87 (Promotional expenditure of Maa
Mustard Oil= mustard oil)
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.83386432
R Square 0.695329704
Adjusted R Square 0.670458659
Standard Error 723.5614066
Observations 54

Coefficients
Intercept 5024.575292
own_price -136.6167655
compe_price 117.4077915
inc_per_capita -0.28234393
pro_exp 7.865084742

5024.58-136.62 (Price of Maa Mustard


Oil) + 117.41 (Price of competitor's
products)-0.2823 (Per capita income of
consumers) + 7.87 (Promotional
Demand for Maa Mustard Oil= expenditure of Maa mustard oil)
● The intercept in the demand function shows that the demand of Maa mustard oil shall be
5024 rupees when price of Maa mustard oil, price of competitor's products, per capital
income of consumers and promotional expenditure of Maa mustard oil is zero.
● For a percentage change in quantity demanded of Maa mustard oil, its price should
decrease by 136.62 times.
● For a percentage change in quantity demanded of Maa mustard oil, the price of
competitor's products should increase by 117.41 times.
● For a percentage change in quantity demanded of Maa mustard oil, the per capital income
of consumers should decrease by 0.2823 times.
● For a percentage change in quantity demanded of Maa mustard oil, its promotional
expenditure should increase by 7.87 times.

Price Elasticity of Demand

PED Slope*P/Q
Slope -136.62 (From the demand function)
P 91.38
Q 13,256

A. Price elasticity of demand (PED)

91.38
PED = 136.6167 X 13,256 = 0.94175

When the demand is inelastic (0<PED<1) . The price changes doesn’t have any impact on the
quantity demanded.

B. Income elasticity of demand (IED)=


7545.15
IED = - 0.28234393 X = - 0.16070
13,256

The mustard oil is an inferior good(IED<0). When the income is increasing the consumer tends
to avoid these goods.

C. Cross Price Elasticity of demand


109.14
CPED = 117.4 X 13,256 = 0.96658
Since the demand for Maa Mustard oil is inelastic to price. Which means for increase in the
price, total revenue increases and for decrease in the price, total revenue decreases (i.e)
They are directly proportional to each other.

Total Revenue can be maximized at a point at which there is unit elasticity, i.e. PED = 1

TR -> PQ
Q =25503.7413-136.62P
Multiplying P on both sides
TR =25503.7413P-136.62(P^2)

First derivative of TR w.r.t. P


d TR/d P =25503.7413-136.62(2P)
We know that when TR is maximum, the slope is zero, hence equating the above to zero,
P -> 93.33823745

Price -> 93.33823745

Competitor's price -> 109.14

Income per capita -> 7620.6015 after 1% increase


Promotional Expenditure -> 1247.31
Quantity -> 5024.58-136.62 (Price of Maa Mustard Oil) + 117.41 (Price of
competitor's products) - 0.2823(Per capita income of consumers) + 7.87 (Promotional
expenditure of Maa mustard oil)

Scenario 2 :
6% increase in the competitor's price

Revised competitor' price 115.6884

Cross elasticity of Slope*Competitor's price/


demand -> Quantity
0.97 =117.41*115.68/Quantity
Quantity -> 14002.05031

To find Optimum price, we use the demand function


5024.58-136.62(Price of Maa Mustard Oil)+117.41(Price of competitor's products)-
Quantity - 0.2823(Per capita income of consumers)+7.87(Promotional expenditure of Maa
> mustard oil)

P 89.81509758

Total Revenue -> 1,257,596


Differential_Revenu
e 67,358

When the competitor increases the price, the company shall benefit if we decrease the price as
total revenue increases by Rs. 69,210

Quantity Total
Price Demanded Revenue
93.3382
4 12,752 1,190,237

89.8151 14,002 1,257,596

DD
94
93.5
93
92.5
92
91.5
91
90.5
90
89.5
12,600 12,800 13,000 13,200 13,400 13,600 13,800 14,000 14,200

Total Revenue Curve


1,270,000
1,260,000
1,250,000
1,240,000
1,230,000
1,220,000
1,210,000
1,200,000
1,190,000
1,180,000
12,600 12,800 13,000 13,200 13,400 13,600 13,800 14,000 14,200

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