Bob\'s Underground, a limited liability corporation specializing in new rap arti
ID: 1104423 • Letter: B
Question
Bob's Underground, a limited liability corporation specializing in new rap artists (B.U. LLC, rap) has the following demand function: where Q is the quantity demanded of the most popular product B.U. sells, P is the price of that product, M is income, and PR is the price of a related product. The regression results are: Adjusted R Square Independent Variables Coefficients Standard Error Stat P-value Intercept 0.8222 32.32 2.46 0.008 2.56 0.626 0.079 0.001 6.045 9.53E-07 0.051 65.77 0.491 1.38 -1.813 PR 1.26 2.025 a. Discuss whether you think these regression results will generate good sales estimates for B.U. LLC, rap Now assume that the income is $35,000, the price of the related good is S24, and B.U. chooses to set the price of its product at $21 b. c. d. e. f What is the estimated number of units sold given the data above? What are the values for the own-price, income, and cross-price elasticities? If P increases by 4%, what would happen (in percentage terms) to quantity demanded? If M increases by 3%, what would happen (in percentage terms) to quantity demanded? IfPa decreases by 5%, what would happen (in percentage terms) to quantity demanded?Explanation / Answer
a) The coefficeints of price and price of reated product is much signifying that cross elasticity and price elasticity is high. Whereas income elasticity is not much high hence it does not suggest good sale estimate.
b) Q = -32.32 - 2.46P + 0.0008M - 2.56Pr
Q= -32.32 - (2.46*(21)) + (0.008*(35000)) - (2.56*(24)) = 134.58
The estimated sale is 134 units approx.
c) Own price elasticity = -2.46
Inicome elasticity = 0.008
cross elasticity = -2.56
d) We know price elasticity = %change in Q / % change in P
If P increases by 4%
-2.46 = %change in Q/0.04
% change in Q = 9.84%
sale will declline by 9.84%
d) % change in quanity = income elasticity * cchange in income = 0.008*0.03 = 0.024% rise in demand.
e) % change in demand = cross elasticity * change in related good price = -2.56 * 0.05 = 12.8% change in QD.