# Consumer Demand Analysis and Estimation Applied Problems

Consumer Demand Analysis and Estimation Applied Problems

Please complete the following two applied problems:

*Problem 1:*

Patricia is researching venues for a restaurant business. She is evaluating three major attributes that she considers important in her choice: taste, location, and price. The value she places on each attribute, however, differs according to what type of restaurant she is going to start. If she opens a restaurant in a suburban area of Los Angeles, then taste is the most important attribute, three times as important as location, and two times as important as price. If she opens a restaurant in the Los Angeles metropolitan area, then location becomes three times as important as taste and two times as important as price. She is considering two venues, respectively, a steak restaurant and a pizza restaurant, both of which are priced the same. She has rated each attribute on a scale of 1 to 100 for each of the two different types of restaurants.

Show all of your calculations and processes. Describe your answer for each question in complete sentences.

- Which of the two options should Patricia pursue if she wants to open a restaurant in a suburban area of Los Angeles? Calculate the total expected utility from each restaurant option and compare. Graph is not required. Describe your answer, and show your calculations.
- Which of the two options should she pick if she plans to open a restaurant in the Los Angeles metropolitan area? Describe your answer, and show your calculations.
- Which option should she pursue if the probability of finding a restaurant venue in a suburban area can be reliably estimated as 0.7 and in a metropolitan area as 0.3? Describe your reasoning and show your calculations.
- Provide a description of a scenario in which this kind of decision between two choices, based on weighing their underlying attributes, applies in the “real-world” business setting. Furthermore, what are the benefits and drawbacks, if any, to this method of decision making?

*Problem 2:*

The demand function for Newton’s Donuts has been estimated as follows:

Qx = -14 – 54Px + 45Py + 0.62Ax

where Qx represents thousands of donuts; Px is the price per donut; Py is the average price per donut of other brands of donuts; and Ax represents thousands of dollars spent on advertising Newton’s Donuts. The current values of the independent variables are Ax=120, Px=0.95, and Py=0.64.

Show all of your calculations and processes. Describe your answer for each question in complete sentences, whenever it is necessary.

- Calculate the price elasticity of demand for Newton’s Donuts and describe what it means. Describe your answer and show your calculations.
- Derive an expression for the inverse demand curve for Newton’s Donuts. Describe your answer and show your calculations.
- If the cost of producing Newton’s Donuts is constant at $0.15 per donut, should they reduce the price and thereafter, sell more donuts (assuming profit maximization is the company’s goal)?
- Should Newton’s Donuts spend more on advertising?

Carefully review the Grading Rubric below for the criteria that will be used to evaluate your assignment.

**Total Possible Score**: 8.00

**1a. Describes, Calculates, and Compares the Expected Utilities (EUs) of the Two Alternatives**

Total: 0.80

Distinguished – Provides accurate calculations, a comprehensive description of those calculations, and a thorough comparison of the expected utilities (EU).

Proficient – Provides calculations, a description of those calculations, and a comparison of the expected utilities (EU). Minor details are missing or few inaccuracies are present.

Basic – Provides calculations, a description of those calculations, and a comparison of the expected utilities (EU). Relevant details are missing or several inaccuracies are present.

Below Expectations – Provides calculations, a description of those calculations, and a comparison of the expected utilities (EU). Significant details are missing and/or many inaccuracies are present.

Non-Performance – The description, calculation, and comparison of the expected utilities (EU) of the two alternatives are either nonexistent or lack the components described in the assignment instructions.

**1b. Describes, Calculates, and Compares the Expected Utilities (EU) of the Two Alternatives**

Total: 0.80

Distinguished – Provides accurate calculations, a comprehensive description of those calculations, and a thorough comparison of the expected utilities (EU).

Proficient – Provides calculations, a description of those calculations, and a comparison of the expected utilities (EU). Minor details are missing or few inaccuracies are present.

Basic – Provides calculations, a description of those calculations, and a comparison of the expected utilities (EU). Relevant details are missing or several inaccuracies are present.

Below Expectations – Provides calculations, a description of those calculations, and a comparison of the expected utilities (EU). Significant details are missing and/or many inaccuracies are present.

Non-Performance – The description, calculation, and comparison of the expected utilities (EU) of the two alternatives are either nonexistent or lack the components described in the assignment instructions.

**1c. Describes, Calculates, and Compares the Expected Utility (EU) with Probability of the Two Alternatives**

Total: 0.80

Distinguished – Provides accurate calculations, a comprehensive description of those calculations, and a thorough comparison of the expected utilities (EU) with probability of the two alternatives.

Proficient – Provides calculations, a description of those calculations, and a comparison of the expected utilities (EU) with probability of the two alternatives. Minor details are missing or few inaccuracies are present.

Basic – Provides calculations, a description of those calculations, and a comparison of the expected utilities (EU) with probability of the two alternatives. Relevant details are missing or several inaccuracies are present.

Below Expectations – Provides calculations, a description of those calculations, and a comparison of the expected utilities (EU) with probability of the two alternatives. Significant details are missing and/or many inaccuracies are present.

Non-Performance – The description of how to calculate the expected utility (EU) with probability of the two alternatives is either nonexistent or lacks the components described in the assignment instructions.

**1d. Provides a Description of a Scenario in a Real-World Business Setting Discussing the Benefits and Drawbacks**

Total: 0.80

Distinguished – Provides a thorough description of a scenario in a real-world business setting discussing the benefits and drawbacks.

Proficient – Provides an adequate description of a scenario in a real-world business setting discussing the benefits and drawbacks, but minor details are missing or unclear.

Basic – Provides a partial description of a scenario in a real-world business setting discussing the benefits and drawbacks. Relevant details are missing.

Below Expectations – Attempts to provide a description of a scenario in a real-world business setting discussing the benefits and drawbacks, but significant details are irrelevant or inaccurate.

Non-Performance – The description of a scenario in a real-world business setting is either nonexistent or lacks the components described in the assignment instructions.

**2a. Describes and Calculates the Price Elasticity of Demand**

Total: 1.00

Distinguished – Thoroughly describes and accurately calculates the price elasticity of demand.

Proficient – Adequately describes and calculates the price elasticity of demand, but minor details are missing or few inaccuracies are present.

Basic – Partially describes and calculates the price elasticity of demand, but relevant details are missing or several inaccuracies are present.

Below Expectations – Minimally describes and calculates the price elasticity of demand, but significant details are missing or many inaccuracies are present.

Non-Performance – The description and calculation of the price elasticity of demand is either nonexistent or lacks the components described in the assignment instructions.

**2b. Derives an Expression for the Inverse Demand Curve**

Total: 1.00

Distinguished – Thoroughly and accurately derives an expression for the (inverse) demand curve/equation.

Proficient – Derives an expression for the (inverse) demand curve/ equation, but minor details are missing.

Basic – Partially derives an expression for the (inverse) demand curve/ equation, but the curve/equation is somewhat inaccurate.

Below Expectations – Attempts to derive an expression for the (inverse) demand curve/ equation, but the curve/equation is inaccurate.

Non-Performance – The derivation of an expression for the (inverse) demand curve/ equation is either nonexistent or lacks the components described in the assignment instructions.

**2c. Discusses Whether or Not Newton’s Donuts Should Reduce the Price to Maximize its Profit **

Total: 1.00

Distinguished – Thoroughly discusses whether or not Newton’s Donuts should reduce the price to maximize its profit.

Proficient – Discusses whether or not Newton’s Donuts should reduce the price to maximize its profit, but some minor details are missing.

Basic – Partially discusses whether or not Newton’s Donuts should reduce the price to maximize its profit. Relevant details are missing.

Below Expectations – Attempts to discuss whether or not Newton’s Donuts should reduce the price to maximize its profit; however, significant details are missing.

Non-Performance – The discussion of whether or not Newton’s Donuts should reduce the price to maximize its profit is either nonexistent or lacks the components described in the assignment instructions.

**2d. Discusses Whether or Not Newton’s Donuts Should Spend More on Advertising **

Total: 1.00

Distinguished – Thoroughly discusses whether or not Newton’s Donuts should spend more on advertising.

Proficient – Discusses whether or not Newton’s Donuts should spend more on advertising, but minor details are missing.

Basic – Partially discusses whether or not Newton’s Donuts should spend more on advertising. Relevant details are missing.

Below Expectations – Attempts to discuss whether or not Newton’s Donuts should spend more on advertising; however, significant details are missing.

Non-Performance – The discussion of whether or not Newton’s Donuts should spend more on advertising is either nonexistent or lacks the components described in the assignment instructions.

**Critical Thinking: Explanaton of Issues**

Total: 0.20

Distinguished – Clearly and comprehensively explains in detail the issue to be considered, delivering all relevant information necessary for a full understanding.

Proficient – Clearly explains in detail the issue to be considered, delivering enough relevant information for an adequate understanding.

Basic – Briefly recognizes the issue to be considered, delivering minimal information for a basic understanding.

Below Expectations – Briefly recognizes the issue to be considered, but may not deliver additional information necessary for a basic understanding.

Non-Performance – The assignment is either nonexistent or lacks the components described in the instructions.

**Written Communication: Content Development**

Total: 0.20

Distinguished – Uses appropriate, pertinent, and persuasive content to discover and develop sophisticated ideas within the context of the discipline, shaping the work as a whole.

Proficient – Uses appropriate and pertinent content to discover ideas within the context of the discipline, shaping the work as a whole.

Basic – Uses appropriate and pertinent content, but does not apply it toward discovering or developing ideas. Overall, content assists in shaping the written work.

Below Expectations – Uses content, though it may be unrelated or inappropriate to the topic. Content does not contribute toward the development of the written work, and may distract the reader from its purpose.

Non-Performance – The assignment is either nonexistent or lacks the components described in the instructions.

**Written Communication: Control of Syntax and Mechanics**

Total: 0.20

Distinguished – Displays meticulous comprehension and organization of syntax and mechanics, such as spelling and grammar. Written work contains no errors, and is very easy to understand.

Proficient – Displays comprehension and organization of syntax and mechanics, such as spelling and grammar. Written work contains only a few minor errors, and is mostly easy to understand.

Basic – Displays basic comprehension of syntax and mechanics, such as spelling and grammar. Written work contains a few errors, which may slightly distract the reader.

Below Expectations – Fails to display basic comprehension of syntax or mechanics, such as spelling and grammar. Written work contains major errors, which distract the reader.

Non-Performance – The assignment is either nonexistent or lacks the components described in the instructions.

**Written Communication: APA Formatting**

Total: 0.20

Distinguished – Accurately uses APA formatting consistently throughout the paper, title page, and reference page.

Proficient – Exhibits APA formatting throughout the paper. However, layout contains a few minor errors.

Basic – Exhibits basic knowledge of APA formatting throughout the paper. However, layout does not meet all APA requirements.

Below Expectations – Fails to exhibit basic knowledge of APA formatting. There are frequent errors, making the layout difficult to distinguish as APA.