Office Enterprises (OE) produces a line of metal office file cabinets. The compa

Question

Office Enterprises (OE) produces a line of metal office file cabinets. The company’s economist, having investigated a large number of past data, has established the following equation of demand for these cabinets:

Q = 10,000 + 60B – 100P + 50C where

            Q = Annual number of cabinets sold

            B = Index of nonresidential construction

            P = Average price per cabinet charged by OE

            C = Average price per cabinet charged by OE’s closest competitor

It is expected that next year’s nonresidential construction index will stand at 160, OE’s average price will be $40, and the competitor’s average price will be $35.

Forecast annual sales. Enter your response as a whole number without the dollar sign.

What will be the new sales forecast if the competitor lowers its price to $32?

What will be the new sales forecast if OE reacts to the decrease mentioned in the previous question by lowering its price to $37? (The competitor’s price will now be $32 and the firm’s own price will be $37.)

If the index forecast was wrong, and it turns out to be only 140 next year, what will be OE’s projected sales assuming the original price information of P = $40 and C = $35? Enter your answer as whole numbers.

Explanation / Answer

Putting B=160, P=40 and C= 35 in previous demand equation we get

Q = 17350.

Therefore sales forecast is 17350.

Now putting C = 32

Q will be less by (50x35 - 50x32)=150.

Therefore sales forecast will be 17200.

Now putting P = 37 and C= 32 we get.

Q= 17500

Now putting B=140, P=40 and C = 35 we get

Q= 16150.

Just put the values in the demand function and you will get the sales forecast.

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