Salim was recently hired by TommyTimms to increase the sales of LoCalori in its home market. Before
Question:
Salim was recently hired by TommyTimms to increase the sales of LoCalori in its home market. Before his meeting with the CMO, Salim collected company's data on historical expenditures on advertising and sales. TommyTimms traditionally followed a cost-based pricing model and had kept the prices of LoCalori quite consistent in the observed period at about $4.37. TommyTimms has only one primary competitor Sentraal offering a brand Bludrink. Salim collected data on Sentraal's advertising from a market research firm and noticed that the average price of Bludrink was around 3.38 for the same period.
Salim was convinced that advertising was no longer very effective because the consumers' preferences and viewing behavior had changed over the last few years. However, to convince the CMO that price changes were effective and TommyTimms needed to update prices more regularly, Salim estimated the following log-linear model.
Consider the following regression results:
Call: lm(formula = ln_sales ~ own_price + own_advtg + comp_price + comp_advtg, data = q) Residuals: Min 1Q Median 3Q Max -0.84762 -0.33200 -0.03155 0.35484 0.86896 Coefficients: Estimate Std. Error t value Pr(>|t|) (Intercept) -1.055e-16 4.619e-02 0.000 1.0000 own_price -6.852e-01 4.588e-02 -14.934 < 2e-16 *** own_advtg 9.967e-02 5.424e-02 1.837 0.0693 . comp_price 5.535e-01 4.642e-02 11.925 < 2e-16 *** comp_advtg -3.363e-01 4.408e-02 -7.628 1.81e-11 *** --- Signif. codes: 0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1 Residual standard error: 0.458 on 95 degrees of freedom Multiple R-squared: 0.7987, Adjusted R-squared: 0.7903 F-statistic: 94.25 on 4 and 95 DF, p-value: < 2.2e-16
Assume all variables are significant. Assume TommyTimms sold an average of 1.1 million units and Sentraal sold an average of 0.71 million units in the observed period.
Compute the price elasticity of LoCalori's up to three decimals.
Corporate Finance
ISBN: 978-0077861759
10th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe