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Case 1:: Explain The Reason of Your Analysis Done in Each Below Case Supporting by Calculations

1) A quantitative analyst was asked to analyze how changes in price, promotional spending, income, gym attendance, and other factors would affect the demand and revenue for Red Bull energy drinks based on a demand function provided. 2) The analysis found that revenue would decrease if price increased, as price is in the denominator of the demand function. Demand would increase with more promotional spending and higher consumer income, as these are in the numerator. 3) Higher gym attendance would reduce demand, as attendance is also in the denominator. A 9% increase in income would lead to an 11.85% rise in demand. Increasing price could lower profits by reducing revenue, assuming costs remain constant. Gym subscriptions were deemed unlikely

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66 views2 pages

Case 1:: Explain The Reason of Your Analysis Done in Each Below Case Supporting by Calculations

1) A quantitative analyst was asked to analyze how changes in price, promotional spending, income, gym attendance, and other factors would affect the demand and revenue for Red Bull energy drinks based on a demand function provided. 2) The analysis found that revenue would decrease if price increased, as price is in the denominator of the demand function. Demand would increase with more promotional spending and higher consumer income, as these are in the numerator. 3) Higher gym attendance would reduce demand, as attendance is also in the denominator. A 9% increase in income would lead to an 11.85% rise in demand. Increasing price could lower profits by reducing revenue, assuming costs remain constant. Gym subscriptions were deemed unlikely

Uploaded by

Lena Phan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Case 1:

It becomes important for managers to accurately forecast the demand of their product and also
understand as how the demand of other products might affect their own product’s demand. In a
rapidly growing market like energy drinks, firms need to capture the market scenario quick enough.
Firms that fail to keep up the changing pace with the market can lose out to their competitors. Red
bull is one of the brands in the energy drink industry. Red bull has estimated the demand of its
product by the following function:
Q = 12.5 P0-1.1A2.1Y1.3P-1.8
Where, Q = Number of energy drink bottles sold of Red bull
P0 = Price of red bull energy drink bottle (in $)
A = Promotional expenditure yearly in $100
Y = Average income of the consumers per month in $100
P = Number of people using the gyms per month
The current price for one bottle of Red Bull energy drink $3, promotional expenditure is $600,
Average income of consumers is $500 and on an average 100 people are going to gym every month.
You are a quantitative analyst and your role is to analyze the below situations in the given scenario.
Explain the reason of your analysis done in each below case supporting by calculations.
a) Will the revenue of Red Bull decrease, if they increase the price of their bottles?
b) How the price of Red Bull energy drink, promotional expenditure and income of the
consumers will affect the sales of Red Bull bottles?
c) If number of people going to gym increases, does it affect the sales of energy drink
bottles?
d) How much will be the demand for bottles sold increases, if the income of the consumers
increases by x % (x = the last digit of your student id)?
e) Will the profit of Red Bull reduce, if they increase the price of their energy drink bottle?
f) Do you think Gym subscription can complement the sale of Red Bull energy drink?
Answer:
Given the equation for demand quantity:
−1.8 2.1 1.3 12.5 A 2.1 Y 1.3
Q = 12.5 P−1.1
0 P A Y = 1.1 1.8
P0 P

a) The revenue would be given by equation:


−.1 −1.8 12.5 A 2.1 Y 1.3
2.1 1.3
TR = P0*Q = 12.5 P P A Y =
0
P .10 P1.8
As P0  is in the denominator, there is an inverse relation between P 0 and revenue Thus, if price
of Red Bull increases, revenue will decrease.
b) From the given equation for demand quantity, we can clearly that price has negative relation
with sales as it is in the denominator. Promotional expenditure and income are both in the
nominator, thus they has positive relation with sales.
Thus, sales will drop when price increases sales will drop; but increase in promotional
expenditure and income will lead to increase in sales volume.
c) As as number of people going to gym is in the denominator of the demand quantity equation,
increase in number of people going to gym will result in decrease in the number of bottles
sold.
d) When the income increases by 9%, the new income is 1.05Y and demand quantity is given by
the new equation:
Q = 12.5 P−1.1
0 P−1.8 A 2.1 (1.09 Y )1.3 = 1.1185∗12.5 P−1.1
0 P−1.8 A 2.1 Y 1.3
The new equation shows that demand quantity will increase by 11.85% if income increases by
9%.
e) Profit = Total Revenue – Fixed Cost – Variable cost
As established in part (a) and (b), when price of Red Bull bottle increases, demand quantity
and total revenue drops.
We could assume that fixed costs are unchanged. Variable costs usually correlate with output
or supply quantity, not with demand quantity, thus should also remain unchanged. If these
assumptions are true, profit of Red Bull will reduced as price rise causes total revenue to drop.
f) As stated in part (c), number of gym users and demand quantity of Red Bull are inversely
related. Increase in number of people going to gym will result in decrease in the number of
bottles sold, thus gym subscription cannot complement sale of Red Bull.

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