Question

A. Set up a spreadsheet to illustrate the effects of changing economic assumptions on the demand for Sun best orange juice. Use the demand function to calculate demand based on three different underlying assumptions concerning changes in the operating environment. First, assume that all demand factors change in unison from levels indicated in the Optimistic Scenario #1 to the levels indicated in Pessimistic Scenario #10. Second, fix all demand factors except the price of Sun best at Scenario #6 levels, and then calculate the quantity demanded at each scenario price level. Finally, fix all demand factors except temperature at Scenario #6 levels, and then calculate demand at each scenario temperature level.
B. Set up a spreadsheet to illustrate the effects of changing economic assumptions on the supply of Sun best orange juice. Use the supply function to calculate supply based on three different underlying assumptions concerning changes in the operating environment. First, assume that all supply factors change in unison from levels indicated in the Optimistic Scenario #1 to the levels indicated in Pessimistic Scenario #10. Second, fix all supply factors except the price of Sun best at Scenario #6 levels, and then calculate the quantity supplied at each scenario price level. Finally, fix all supply factors except temperature at Scenario #6 levels, and then calculate supply at each scenario temperature level.
C. Set up a spreadsheet to illustrate the effect of changing economic assumptions on the surplus or shortage of Sun best orange juice that results from each scenario detailed in part A and part B. Which operating scenario results in market equilibrium?
Spreadsheet analysis is an appropriate means for studying the demand and supply effects of possible changes in various exogenous and endogenous variables. Endogenous variables include all important demand and supply-related factors that are within the control of the firm. Examples include product pricing, advertising, product design, and so on. Exogenous variables consist of all significant demand and supply-related influences that are beyond the control of the firm. Examples include competitor pricing, competitor advertising, weather, general economic conditions, and related factors.
In comparative statics analysis, the marginal influence on demand and supply of a change in any one factor can be isolated and studied in depth. The advantage of this approach is that causal relationships can be identified and responded to, if appropriate. The disadvantage of this marginal approach is that it becomes rather tedious to investigate the marginal effects of a wide range of demand and supply influences. It is here that spreadsheet analysis of demand and supply conditions becomes useful. Using spreadsheet analysis, it is possible to learn the demand and supply implications of an almost limitless range of operating scenarios. Rather than calculating the effects of only a few possibilities, it is feasible to consider even rather unlikely outcomes. A complete picture can be drawn of the firm's operating environment, and strategies for responding to a host of operating conditions can be drawn up.
To illustrate this process, consider the hypothetical case of Sunbest Orange Juice, a product of California's Orange County Growers' Association. Both demand and supply of the product are highly sensitive to changes in the weather. During hot summer months, demand for Sunbest and other beverages grows rapidly. On the other hand, hot, dry weather has an adverse effect on supply by reducing the size of the orange crop.
Demand and supply functions for Sun best are as follows:
QD = 1,000,000 - 25,000,000P + 10,000,000PS + 1,600Y + 50,000T (Demand)
QS = 8,000,000P - 100,000PL - 120,000PK - 150,000T (Supply),
where P is the average wholesale price of Sun best ($ per case), PS is the average wholesale price of canned soda ($ per case), Y is disposable income per household ($), T is the average daily high temperature (degrees), PL is the average price of unskilled labor ($ per hour), and PK is the risk-adjusted cost of capital (in percent).
During the coming planning period, a wide variety of operating conditions are possible. To gauge the sensitivity of demand and supply to changes in these operating conditions, a number of scenarios that employ a range from optimistic to relatively pessimistic assumptions have been drawn up in Table 3.4.
Demand and supply functions for Sun best orange juice can be combined with data on the operating environment to construct estimates of demand, supply, and the amount of surplus or shortage under each operating scenario.



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  • CreatedFebruary 13, 2015
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