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Q1:- What are the relevant factors to be considered for modelling a demand function for Maa

Mustard Oil? How is each factor related to elasticities of demand? How does the estimation of
demand function incorporate the impact of each factor using the multiple regression technique?

Factors are price of maa mustard oil, price of competitors, per capita income of customers, promotional
expenditure of maa mustard oil are the factors to be considered for modelling a demand function for
Maa mustard oil.

Factors Relation to Elasticities of Demand are as follows:

 Price of Oil related to elasticities of demand :- Negative


 Income of the Consumers- Negative
 Price of competitors product:- Positive
 Promotional Expenditure of Maa Oil.- Positive
 Preference of Consumers- Negative

Interpretation of Demand Function:

Q (demand_Maa) = 5024.753-136.6168(own_price)+ 117.4078(compe_price) -


0.2823(inc_per_capita)+ 7.8651(pro_exp) ………………………………(Eqn 1)

● For a percentage change in quan ty demanded of Maa mustard oil, its price should decrease by
136.62 times.
● For a percentage change in quan ty demanded of Maa mustard oil, the price of compe tor's
products should increase by 117.41 times.

● For a percentage change in quan ty demanded of Maa mustard oil, the per capital income of
consumers should decrease by 0.2823 times.

● For a percentage change in quan ty demanded of Maa mustard oil, its promo onal expenditure
should increase by 7.87 times.

Q2: - Analyze the estimated demand function and calculate the elasticities of demand for Hind Oil
Industries product. What do these calculations suggest about the effects of changes in each of these
variables?

A.

Price elasticity of demand (PED) PED = 136.6167 X 91.38 13,256 = 0.94175 When the demand is inelastic
(0<PED<1).

The price changes don’t have any impact on the quantity demanded.

B.

Income elasticity of demand (IED)= IED = - 0.28234393 X 7545.15 13,256 = - 0.16070 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 CPED = 117.4 X 109.14 13,256 = 0.96658

Q3. What would be the impact of a price change by HOI on the total revenue of Maa mustard oil,
keeping other variable constant?

Ans: When the elasticity of demand is inelastic that is (less than 1) the % change in quantity < % change
in price, i.e our price effect outweighs the quantity effect, hence causing an increase in the total
revenue for the company. if we increase prices, the revenue gained from the higher price will outweigh
the revenue lost from less units sold.

Q4. What is optimum price at which total revenue can be maximized for Maa mustard oil if the
competitors’ prices do not increase in october2015 (scenario 1)? If competitors increase their price by
around 6% as suggested in case (scenario 2), what would be the optimum price? Does the company
benefit if competitors increase their price? perform all calculation under the assumption of no
increase in promotional expenditure in the next month and 1% increase in the per capita
income of consumer?

Ans: Q (demand_Maa) = 5024.753-136.6168(own_price)+ 117.4078(compe_price) -


0.2823(inc_per_capita)+ 7.8651(pro_exp) ……………………………………………………………(1)

A.T.Q

Prediction of October 2015 optimum price where total revenue can be maximized

compe_price = 109.14

inc_per_capita=7620.601 (1% increase) -------à (7545.15 *1.01)

pro_exp =1247.31

own_price =P

Quantity demand =Q

Q = 5024.753-136.6168P+117.4078*(109.14)-0.2823*(7620.601 )+ 7.8651*(1247.31)

Q=5024.753-136.6168P + 12813.8872 - 2151.2956 + 9810.2178

Q = 25497.5624-136.6168P---------(2)

Now,

Total Revenue = TR

TR= P * Q--------(3)

By putting eq 2 in (3) we get

TR= P(25497.5624-136.6168P)

TR=25497.5624P-136.6168P^2------------(4)

Now differentiating both sides w.r.t to Q

d(TR)/d(P) = 25497.5624 *d(P)/ d(P)-2*136.6168*P* d(P)/ d(P)

d(TR)/d(P) = 25497.5624- 273.2336P

As slope at TR max is zero therefore


d(TR)/d(P)=0

0= 25497.5624- 273.2336P

P = 25497.5624/273.2336

P= 93.3178---------(5)

Now putting value of P in eq(4)

TR=25497.5624*93.3178-136.6168*93.3178*93.3178

TR= 2379376.4285-1189688.0294

TR=1189688.3991

The optimum price at which total revenue can be maximized is 93.3178

Scenario 2

Prediction of October 2015 optimum price where total revenue can be maximized

compe_price = 115.6884(6% increase)------à 109.14*1.06

inc_per_capita=7620.601 (1% increase) -------à (7545.15 *1.01)

pro_exp =1247.31

own_price =P

Quantity demand =Q

Q = 5024.753-136.6168P+117.4078*(115.6884)-0.2823*(7620.601 )+ 7.8651*(1247.31)

Q=5024.753-136.6168P + 13582.7205- 2151.2956 + 9810.2178

Q=5024.753+ 13582.7205- 2151.2956 + 9810.2178-136.6168P

Q=26266.3957-136.6168P--------(6)

Now,

Using eq 3

TR = P * Q

By putting eq 6 in (3) we get


TR= P(26266.3957-136.6168P)

TR=26266.3957P-136.6168P^2------------(7)

Now differentiating both sides w.r.t to Q

d(TR)/d(P) = 26266.3957*d(P)/ d(P)-2*136.6168*P* d(P)/ d(P)

d(TR)/d(P) = 26266.3957- 273.2336P

As slope at TR max is zero therefore

d(TR)/d(P)=0

0= 26266.3957- 273.2336P

P = 26266.3957/273.2336

P=96.1316

Now putting value of P in eq(7)

TR=26266.3957*96.1316-136.6168*96.1316*96.1316

TR=2525030.6448-1262514.7188

TR=1262515.926

The optimum price at which total revenue can be maximized is 96.1316

Since the total revenue of hind oil product increases when price of competitive product is raised by 6%

Q. 5. Plot a demand curve and a total revenue curve using the estimated value of quantity demanded
from question 4. Analyze the findings of question 4 by using the concept of the total revenue test and
the plotted graphs

ANSWER