Setting up a model to forecast future demand, Microeconomics

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Because of your reputation as an expert in economic analysis, you have been hired as vice president of a business consulting firm named Economists R Us.  This firm provides consulting services for a wide variety of manufacturing and retail companies.  You will be meeting with clients next week to review the following economic issues.  Your report should be a professional presentation.  These questions have multiple parts, so be sure to the answer is complete.

1.       Speedy Limo is a limousine service located on the north side of Cleveland.  It specializes in transporting people to and from Hopkins International airport, although it will deliver people anywhere in the Cleveland area.  It competes with taxis and public transportation as well as people deciding to drive their own cars.  The demand for the firm's services has been increasing as more consumers use the service for convenience and due to higher parking rates at the airport.  However, increases in gasoline prices and wage rates for drivers have increased costs for the firm.  Describe the supply and demand shifts that are occurring for this firm (graphs might help in your description).  What would happen to the demand curve if the major taxi companies lowered their prices?  If you were asked to forecast future demand for this firm, how would you set up a forecasting model?

2.      Sonic Boom Corporation sells drum sets.  At a price of $600 per set, they sold about 500 sets per month.  The new general manager for this product, Ella Sticity, decided that the company needed more revenues and increased the price to $700 per set.  However, Sonic Boom is now selling only 200 drum sets per month at the new price.  What is the arc price elasticity for this product?  Define price elasticity and how it should be used for pricing this product.  What do you recommend for the price of this product (e.g. stay at $700 or change, higher or lower?)  and what additional information would be useful in the pricing decision?  What would be your recommendations for setting up a model to forecast future demand for this product?

 


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