Show the 5 variables on projector:

Price of Katrina’s Sugar Free Chocolate;

Price of the substitute good;

Complementary good;

Income;

Number of buyers in the market.

ECO550_2_2_Maria-4: Very interesting! Could you please go over these five independent variables with me?

ECO550_2_2_Herb-5: Sure! The first independent variable is theprice of Katrina’s sugar-free chocolate.  The model must include the price of sugar-free-chocolate; otherwise, there is no demand curve.

Next is the price of the substitute good.  In the case of chocolate, caffeinated coffee is the substitute good. Then there is the complementary good; for Katrina’s model, we selected bottled water; therefore the price of bottled water is the next independent variable. Income is another variable typically included in a demand curve.  For our model, we selected median household income.

Last, since we are interested in the market for Katrina’s sugar-free-chocolate, the number of buyers in the market is included as an independent variable.

ECO550_2_2_Maria-5: Thanks for going over that. You and Renee were certainly busy!
ECO550_2_2_Herb-6: Yes, we were! I am going to use the data you provided to estimate the model to see if we selected the right set of determinants. Then, Renee and I can use the model to develop other measures that tell us more about the market for Katrina’s sugar-free-chocolate.

Shows the model on the projector

Show on the projector: The notation on the left side of the equal sign, Qsubscript-d-k-s-f-c represents the dependent variable

ECO550_2_3_Herb-1:Here this may help with the concept of estimation, here’s what the finalized model should look like. We will talk about the actual estimation process in a few moments.

ECO550_2_3_Maria-2: I’m not too sure of what this model contains, could you explain further?

ECO550_2_3_Herb-2: Gladly! The notation on the left side of the equal sign, Q subscript-d-k-s-f-c represents the dependent variable which is the quantity of Katrina’s sugar-free-chocolate candy.  The terms on the right-side of the equal sign are the independent variables I just explained.

ECO550_2_3_Maria-3: That makes a lot more sense now! Where does the estimation process come into play?

ECO550_2_3_Herb-3: Estimating the model means to find values for the coefficients, which in our model are the “b’s”.  Coefficients are numeric values that indicate how much the quantity of the dependent variable will change as independent variables change. The data you compiled will be used to calculate the coefficient values. This information is important as it helps determine the quantity demanded of sugar-free-chocolate changes in response to changes in the independent variables included in the model.
ECO550_2_3_Maria-4:Okay, got it.  You’ve used the terms “dependent variable” and “independent variable”while explaining the model.Could you provide me with some insight on these terms?
ECO550_2_3_Herb-4:Yes, of course.  A dependent variable is a variable that changes value when changes occur in some other variable. The term “variable” is used to capture the fact that the value can change.  On the flipside, an independent variable is a variable that impacts or causes a change in the dependent variable.
ECO550_2_3_Maria-5:Okay, Herb, I think I understand now.  Can you give me examples of dependent and independent variables that are different from Katrina’s sugar-free-chocolate candy?
ECO550_2_3_Herb-5:Yes I can, Maria.  I believe a good example is umbrellas. Think about umbrella sales, when the weather changes from clear to rainy, people buy more umbrellas. This is especially prevalent with people who may have left their umbrellas at home.  In this example, the quantity of umbrellaspurchased changes when the weather changes, so it is quite easy to identify the dependent and independent variables in this example.  The quantity of umbrellas sold is the dependent variable while rain is the independent variable.
ECO550_2_3_Maria-6:That’s anexcellent example, Herb. I understand exactly how the model functions now.  The independent variables you and Renee selected will explain what caused or is causing the demand for Katrina’s sugar-free chocolate candy to change.
ECO550_2_3_Herb-6: Yes, Maria, that’s right. Using the data you provided, we are going to see how well the model we formulated explains the demand for sugar-free-chocolate candy.

Insert the URL for the Census Bureau

Show a pictures of the Strayer Resource Center

ECO550_2_4_Maria-1:I located most of the data you requested involving the number of sugar-free-chocolates Katrina’s sold since introducing the new candy and the selling prices. You will notice that this data is available in our accounting database.  However, I had to search outside of the database for other data.
ECO550_2_4_Herb-2: What other data did you need to acquire and how did you go about doing this search?

ECO550_2_4_Maria-2:I needed to find the prices of coffee and I simply did a Google search and looked for reliable sources of information pertaining to concepts such as the price of coffee.

ECO550_2_4_Herb-3: Okay, that leaves data on the price of water, median income and the number of buyers.  Where did you retrieve data for these independent variables?
ECO550_2_4_Maria-3: Well, I retrieved median household income data from the U.S. Census Bureau website. Census data is easy to find, reliable and easy to use.  I just went to the Census Bureau website, typed in the key term, “household income,” then selected the median household income for the appropriate years.
ECO550_2_4_Herb-4:Did you know you could have retrieved data on income and other variables by going through Strayer’s Global campus’ Resources Center?
ECO550_2_4_Maria-4: No, I didn’t know that, Herb.  Isn’t access to Strayer’s Resources Center restricted?
ECO550_2_4_Herb-5:Yes, only enrolled students, faculty and staff and subscribers can use the Resource Center. However, since there are so many Strayer educated employees here at Katrina’s, we have free access to the Resource Center.
ECO550_2_4_Maria-5:That’s great news, Herb!
ECO550_2_4_Herb-6: I agree! So in the future when you need to search for data, check out the Resource Center first.

ECO550_2_5_Maria-3: Sure thing! When data is not available for a variable, analysts often use data from another variable to capture the same relationship as the original variable. It is this substitute variable that is referred to as “proxy variable.”
ECO550_2_5_Herb-3: Does data for proxy variables work as well when the model is estimated?
ECO550_2_5_Maria-4:That depends, in some cases the answer is yes and in others it is no. In order to determine the answer, you are required to estimate the model to find out.  Keep in mind that if the proxy data does not work, then the variable is dropped from the model.
ECO550_2_5_Herb-4: Thanks for the clarification on this subject. We can continue with our updates on the data you collected.

Show data table of per capita consumption of bottled water.

ECO550_2_6_Herb-1:The data I’m looking at shows the per capita consumption of bottled water, by gallon over twelve years.  I think this data works well as a proxy. What data did you find to proxy the number of buyers?

ECO550_2_6_Maria-2: I had to think hard about a number of buyers proxy. In the end, I found a good proxy in a Department of Commerce report, it is called “Current Industrial Reports.” The proxy I used dealt with the confectionery exports of domestic merchandise measured in pounds per year.

ECO550_2_6_Herb-2:This data also serves as a great proxy.  Of course, I’ll have to consult with Renee to get her opinion because she’s the one mentoring me on this project.  But I’m fairly certain Renee will agree with me.
ECO550_2_6_Maria-3:Okay! Here’s the data I compiled from our accounting records.
ECO550_2_6_Herb-3: Great!  Now, can we create the data set in Excel and then estimate the model?

ECO550_2_6_Maria-4:That’s correct! I have some great resources that will help you review how to create datasets in Excel and how to use Excel functions to estimate the model. Please look over these resources and I will get back to you once you are finished.

ECO550_2_6_Herb-4:Okay that sounds great!

Incorporate iPad to show Videos about Excel and model creation

·        Multiple Linear regression analysis using Microsoft Excel’s Data Analysis toolhttp://www.youtube.com/watch?v=ZwtxHXh-ZXU

·        Multiple Regression Interpretation in Excel http://www.youtube.com/watch?v=tlbdkgYz7FM

Show regression output table

Herb shows formula

Herb shows Maria the updated formula

One more formula for Herb to go over

Display on projector: The new quantity demanded is, three hundred seventy-four thousand, three hundred sixty-six point two boxes of sugar-free-chocolates.

ECO550_2_8_Herb-1: Wow! That was fast!
ECO550_2_8_Maria-2:Yes, Herb, Excel generates results almost instantaneously.
ECO550_2_8_Herb-2: Okay, let’s see what we have. I see the coefficients are presented in a single column.  Let me rewrite the model to include the coefficient values.

ECO550_2_8_Maria-3: What does all of this mean?
ECO550_2_8_Herb-3: Well, the first number, three hundred and forty four thousand and four hundred point five refers to the number of boxes of sugar-free-chocolate demanded if none of the independent variables changed their value.  If we assume one of the other variables changes while all of the others remain constant, then we calculate a new number of boxes of chocolate.

ECO550_2_8_Maria-4: Could you give me an example for this change?

ECO550_2_8_Herb-4: Sure! For my example, let’s assume that the price of Katrina’s sugar-free-chocolates declines by one dollar while none of       the other independent variables changes.  According to our model, the decrease in price would cause quantity demanded to increase by twenty nine thousand and nine hundred and sixty five point seven boxes. Each of the other coefficients is then interpreted similarly. Here’s the way we calculate the change in quantity demanded, if price was to change.For all of the variables that are constant, that is, those unchanging variables, we substitute a “zero.”
ECO550_2_8_Maria-5: That is very interesting! Is there anything else I should know?

ECO550_2_8_Herb-5: There is one more thing I’d like to add. For the price of Katrina’s sugar-free-chocolate, substitute one dollar, with a negative sign in front of it to indicate price declined. Here, I’ll show you how the model determines quantity demanded. After making the changes the new quantity demanded is, three hundred seventy-four thousand, three hundred sixty-six point two boxes of sugar-free-chocolates.

ECO550_2_8_Maria-6:Thank you for sharing that with me! Now that you explained this all to me, things are much clearer.
ECO550_2_8_Herb-6: Not a problem at all. As you can see, regression models are useful but only if the results from the model are valid.

Display on projector: The coefficient of determination ranges from 0 to 1.

Display on projector: A higher adjusted R-square indicates a better model.

http://wn.com/r-squared_or_coefficient_of_determination

ECO550_2_9_Maria-1:How do we that?
ECO550_2_9_Herb-2: First, we evaluate the adjusted R-square value to see how much of the variation in the quantity demanded of sugar-free-chocolates is explained by the independent variables we included in the model.  The closer R-square is to one, the better is the explanatory power of the independent variables.The adjusted R-square for our model’s results is point seven, nine, nine which means the model explains seventy-nine point nine percent of the variation in the quantity of sugar-free-chocolates. Maria, I found this video that helps to explain the coefficient of determination from another standpoint.
ECO550_2_9_Maria-2:Based upon the explanation you gave about R-square being close to one, seventy-nine-point-nine percent is very good.
ECO550_2_9_Herb-3:Yes, it looks as if we included the right set of independent variables.

ECO550_2_9_Maria-3:What’s next, Herb?
ECO550_2_9_Herb-4:Now we evaluate the overall significance of the independent variable. We are looking for the answer to the question: Can the behavior of the dependent variable, our quantity of sugar-free-chocolates, be explained without relying on the independent variables included in the model? For this test we will evaluate the F-statistic. We first need to state the level of significance, called the “critical-value,” which we will use to test the F-statistic.
For our model we are going to use the five-percent level of significance; therefore,the table gives us a critical F-value of four-point-one-two.
ECO550_2_9_Maria-4:I think I understand how you selected the critical value. I think now we must compare the F-statistic generated for the model to the critical value.

ECO550_2_9_Herb-5:Yes, that’s exactly what we will do. Since the F-calculated value is eleven-point-nine-five-two and is greater than four-point-one-two, a significant relationship does exist between the quantity of sugar-free-chocolate and the four independent variables.
ECO550_2_9_Maria-5:Great! So we’re done then?
ECO550_2_9_Herb-6:No, not quite yet. We still need to evaluate the significance of each coefficient.  We can actually use the same method used to find the critical value of F only this time we will conduct a t-test on each coefficient value.

ECO550_2_10_Maria-5:Let’s run the regression without data on caffeinated coffee—I’m anxious to see if there is any difference in the results.

ECO550_2_10_Herb-5: Okay, but before we re-estimate the model, I think we should also drop the bottled water variable. After some consideration, the amount of water consumed is not a good proxy for the price of water.  Also, the correlation coefficient between bottles of water and income is nearly one.  Therefore, there seems to be a problem with their correlation.  Keep in mind that we also need to add a Dummy variable to measure the impact of sugar-free-chocolate which Katrina’s introduced into the market last year. Renee and I forgot to include a dummy variable in the first model.

ECO550_2_10_Maria-6: Whatever you say, Herb.  You know this process better than I do.

ECO550_2_10_Herb-6:Let me compute this quick. (pause) Here are the results now.

ECO550_2_11_Maria-3:Okay, so where is the data to calculate elasticity?
ECO550_2_11_Herb-3:The regression coefficients or the b’s in the model are the change in quantity divided by a change in price, so that part is simple.
ECO550_2_11_Maria-4:Do you mean the negative forty-two thousand, one hundred eighty-nine that is the coefficient for the price variable?
ECO550_2_11_Herb-4:Yes, however, we have to calculate the “q” that’s in the elasticity of demand formula.

ECO550_2_11_Maria-5:What does the ‘q” stand for?
ECO550_2_11_Herb-5: In the elasticity formula, q, is the quantity demanded at a specific price.  For this step, we first find the demand curve.
ECO550_2_11_Maria-6:I thought we already have the demand curve.
ECO550_2_11_Herb-6: Not quite yet, I was discussing the regression equation which includes all of the independent variables we included in the model.  The demand curve is different, as only the price variable is included in the demand curve.For our example we will use some numbers from 2004. We will then use these numbers to showcase how to derive the demand curve. First, go back to the regression equation. Now substitute the data as follows. For income, substitute one-thousand dollars and for exports substitute two-six-three-three-six-six point seven.

ECO550_2_12_Herb-1:No, not yet.  Just solve what you have as this will give the demand curve.

ECO550_2_12_Maria-2:Is that all there is to finding the demand curve from the regression model?
ECO550_2_12_Herb-2: Yes, that’s it!  We’re nearly finished as we have only two more steps to calculate elasticity. Again using the data from 2004 substitute twenty-four dollars for price variable into thedemand curve and solve to get a quantity equal to two-million, ninety-six thousand, seven-hundred eight-point eight-eight. The elasticity coefficient is then negative zero point four-eight-two-nine. We can then round to negative zero point four-eight-three.

ECO550_2_12_Maria-3:Thank you for going over this with me. Since you showed me how to do this, things seem clearer. Does this mean we are finished with this stage of the process to create information for Ken to use when he considers the decision to expand into international markets?
ECO550_2_12_Herb-3: Yes, we have completed this stage.  We just need to update Renee on our progress.

ECO550_2_12_Maria-4: I will update Renee on our findings. While I complete this task could you complete this review activity based on what we just discussed?

Scenario-based and will use folder structure to present scenario, then have tabs to represent options for answers

Narrations will be provided for scenario overview and choices (feedback included as well)

ECO550_2_13_Maria Incorrect response-3:

We should expect the percentage change in quantity demanded to change by less than the percentage change in price.

ECO550_2_13_Maria, Disagree, Option 2-4: When the absolute value of the price elasticity of demand coefficient is less than one it means demand is inelastic, so if price is increased by a certain percentage, say ten percent, demand will change by a lower percentage, such as eight percent.  Therefore, when demand is price inelastic, increasing the price actually results in higher total revenue. For Katrina’s, this means demand for sugar-free-chocolate is price inelastic and the company could increase total revenue by increasing price.

ECO550_2_14_Maria-1: We sure have.  Let’s outline the tasks we completed to make certain we remember everything. First, you explained the demand model that you and Renee formulated. I then described the data and its sources for the data that I compiled.  We later discussed proxy data and agreed it was okay to use this kind of data for two of the variables.
ECO550_2_14_Herb-2: Let’s not forget about our creation of the data set in Excel along with the creation of our estimation model.

ECO550_2_14_Maria-2: I’m glad you brought that up! Next, we discussed the results of our model and conducted significance tests for the model and its coefficients. Lastly, we used these results to generate an amended regression model to formulate the demand curve and calculate the price elasticity of demand coefficient.
ECO550_2_14_Herb-3: Thank you for the recap. I will be sure to update Renee on what we covered today.

ECO550_2_14_Maria-3: That’s fantastic! I will talk to her as well when I see her next.  That is all for today, I’m now going back to my office to update Ken on our progress with this project. Until we meet again,don’t forget to complete your weekly threaded discussions based on the key concepts we covered this week.

ECO550_2_14_Herb-4:Thanks,Maria and have a great day!

Takes place in Ken’s office

·        Ken and Herb

President of Katrina’s Candies- Ken Sanders

Grad Student/ Part-time Data Analyst- Herb Jones

ECO550_1_2_Ken-2: We mostly produce candy for domestic and international markets and we currently employ approximately three hundred employees in a variety of capacities. Because of our size, we conduct a significant portion of our business via the internet. Currently, we have a management team consisting of a manager, senior data analyst and financial officer. You will get a chance to meet all of them soon. So, now tell me a little about yourself; I have been out of the country for business and didn’t get a chance to review your new hire file.
ECO550_1_2_Herb-1: Thank you, Mr. Sanders!  I am Herb Jones and I was recently hired to serve as the new part-time data analyst. Currently, I am a full-time Strayer University student finishing the last four courses of an MBA management program through the Global campus. I enrolled full-time in Strayer’s online program about three years ago.
ECO550_1_2_Ken-3: Yes, I do recall our Management Department supervisor Gigi Thomas, making a strong case to convert the position to part-time and hold the full-time position for you. Gigi told me your educational preparation impressed her.  Do you have work experience, too, Herb?
ECO550_1_2_Herb-2: Yes, I have about four years experience working as a consultant for several proprietary firms much smaller than Katrina.  Mostly, I served as liaison between the firms and their clients…verifying task descriptions conducting quality control reviews, and recording problems with defective products for sequential follow-ups after tasks were completed.  I was the eyes and ears of my clients outside of their offices.  Interesting jobs– but I wanted something different.
ECO550_1_2_Ken-4: You’re in the right place to get a new experience—we’re at the threshold of making a change in our general mission. As you were talking, I reviewed our electronic version of your transcript.  I see why Gigi was impressed! Strayer exposed you to the type of skills we need to round out our management team.

Takes place in Ken’s Office

·        Ken and Herb

[Herb and Ken proceed towards the conference room]

I’m really nervous about making such a venture because the international arena is unchartered territory for us– except for the recent pilot project.

ECO550_1_3_Herb-2: Ken, what was the item Katrina’s Candies piloted in the international market?

ECO550_1_3_Ken-3: Sugar free chocolate candy …it’s been a big success in a couple of international markets as well as among health conscious U.S. consumers.  I’m just not sure the success we’re seeing isn’t just a new-kid-on-the-block phenomenon; as I will need to be completely sure before directing resources to the product!  Anyway, you’re here to help Renee, our analyst, get me up to speed on the type of information I need to make a decision.  Gigi’s going to give more details about your role in the project shortly.

ECO550_1_3_Herb-3: Thank you for the update Ken.  I look forward to working on this project and I will do my best to see this project to completion!

ECO550_1_3_Ken-4: Well, let me get you to the conference room, the team meeting is scheduled to begin in a few minutes.

Takes place in Conference Room

·        Kenneth Sanders

·        Herb Jones

·        Gigi Thomas

Supervisor of the Management Department- Gigi Thomas

ECO550_1_4_Gigi-2: Hi, Herb. Good to see you here. The management team is really excited about you joining us!
ECO550_1_4_Herb-2: Hello, Gigi. I’m excited to be here as well!
ECO550_1_4_Gigi-3: [Looks down at her phone… reads, then says] Ken just texted me.  He said your meeting went well and that he briefed you about Katrina’s Candies history and briefly mentioned changes in our revenues.

ECO550_1_4_Herb-3: Yes, my meeting with Ken went really well.  He’s an interesting person; warm and friendly.  I was nervous about meeting him but he put me at ease right away!
ECO550_1_4_Gigi-4: Good! We want you to feel comfortable working here at Katrina’s Candies. Let’s start off with some introductions from the rest of the team.

Takes place in Conference Room

·        Herb Jones

·        Gigi Thomas

·        Renee Smith

·        Maria Scott

Senior Level Data Analyst- Renee Smith

Supervisor of the Finance and Accounting Department- Maria Scott

ECO550_1_5_Herb-1: Hi, Renee, I remember you from my interview. You asked those difficult questions about which tools to use for analyzing data.
ECO550_1_5_Renee-2: [Laughter] Yep, that was me!
ECO550_1_5_Gigi-2: Maria, you’re next.
ECO550_1_5_Maria-1: Hello, Herb, good to see you again. I’m Maria Scott; I supervise the Finance and Accounting Office.  I          graduated from Strayer too, with an MBA in Accounting and am also a Certified Public Accountant. I’ve been at Katrina’s Candies for about nine years. For the project you’re going to work on, I’ll direct you to any data you’ll need.  Either Renee or you can request the data as needed. Do not hesitate to let me know If I can do anything else as you’re progressing through the project.
ECO550_1_5_Herb-2: Thank you and nice to meet you again, Maria.
ECO550_1_5_Gigi-3: Thanks, Maria and Renee! That leaves me. I’m Gigi Thomas, Senior Manager, and team-manager for this project.  I’ve been with Katrina’s Candies for about fifteen years.  My educational background is management and I have an MBA degree from the College of France- in Paris, France.

ECO550_1_5_Herb-3: That is very neat! I’ve always wanted to go to Paris and see the sights.
ECO550_1_5_Gigi-4: Yes, Paris is quite the place, no other place like it! Now that we’ve reintroduced ourselves, let me explain, again, why Herb was hired and why our team was formed.

As many of you know, Katrina’s Candies Board of Directors has asked Ken to explore and consider expanding into the international markets where our new sugar free chocolates are doing well. Before Ken can respond to the Board, he needs to know what’s causing the increase in revenue and whether the increase is sustainable.  That’s where we come into the picture. Does anyone have any questions?

ECO550_1_5_Maria-2: Yes, I have a question about the Board’s directive to Ken. Is it the board’s responsibility to tell Ken how Katrina’s Candies should operate?

ECO550_1_5_Gigi-5: Good question, Maria. Actually, although Ken’s family owns Katrina’s Candies, as president, Ken is considered a manager and the Board is considered the owner. Theoretically, owner’s and manager’s goals diverge. Owners want managers to act in the best interest of shareholders; while manager’s act in their own self-interest. This situation is known as the principal-agent problem. We have a new board that isn’t aware Ken is an owner.  So, the board is just making certain Ken is considering decisions that are best for shareholders.
ECO550_1_5_Maria-3: Thanks, Gigi. I understand now.
ECO550_1_5_Gigi-6:  Any other questions?
ECO550_1_5_Herb-4: Yes, how long do we have to get something to Ken?
ECO550_1_5_Gigi-7: Renee, you can answer this one.
ECO550_1_5_Renee-3: About the timeline, excluding this week, it should take us nine weeks at most. Ken is leaving it up to us to determine the type of information that best tells the story. At this point, our first tasks are to build a model of the demand for our sugar free chocolate candy, estimate the model, and analyze the results.  Results from estimating the model will guide the remainder of our process.
ECO550_1_5_Gigi-8: Fantastic, Renee! So, is everyone ready to begin? We have a lot to do.
ECO550_1_5_Herb-5: Yes!
ECO550_1_5_Renee-4: Yes!
ECO550_1_5_Maria-4: Yes!
ECO550_1_5_Gigi-9: Well, let’s get going. Herb, go with Renee, she has things laid-out in her office to get you started.
ECO550_1_5_Herb-6: Okay, sounds great!
ECO550_1_5_Gigi-10: Great, the meeting is adjourned.

Renee should be writing these five (5) basic categories of variables that affect consumer purchases.

Price of substitute goods

Price of complementary goods

Income

Preference or tastes, advertising expenditures

Number of buyers

ECO550_1_6_Herb-1:  As ready as one can be. (laughing) It’s great to be here and have the opportunity to learn how a firm conducts an analysis.

ECO550_1_6_Renee-2: Did you study managerial economics in your graduate program at Strayer?
ECO550_1_6_Herb-2: Yes, I did. So, now I want to apply what I have learned.

ECO550_1_6_Renee-3:  Actually, you’ll find there isn’t much difference between what you learned theoretically and what Katrina’s Candies does in reality. We do want to observe some best practices when it comes to analyzing our data. We first and foremost want to make certain our approach is consistent with our rivals. In fact, we pretty much follow what economic theory recommends as the best way to evaluate changes in revenue.

ECO550_1_6_Herb-3: Oh, I see. I can understand that by using economic theory it can really make things a little easier on us.
ECO550_1_6_Renee-4: It definitely makes things a lot more simplified when investigating these changes. Let’s get started. Do you recall studying supply and demand theories?
ECO550_1_6_Herb-4: Yes, I remember studying both theories.
ECO550_1_6_Renee-5: Good.  Tell me, what do you remember about demand theory?

ECO550_1_6_Herb-5: I recall that the law of demand states that price and quantity demanded are is inversely related. Meaning, if Katrina’s Candies was to lower the price of one of its chocolate products, consumers would purchase more. However, if Katrina’s Candies increased the price of one of its chocolate products, the amount of chocolate consumers would purchase would decline.

ECO550_1_6_Renee-6: Yes, that’s right! We certainly understand the law of demand.  A few years back, after posting losses for a few months, our management team voted to raise prices.  Well, what a mess that was! Our sales declined within days!  We really had to scramble to inform the public that the price would return to its original price. But in the current case, where our revenue is increasing, Katrina’s Candies didn’t lower the price of existing products.  Also, for our new sugar free chocolate candy, we’ve sold that product at the same price as one of our other chocolates.

ECO550_1_6_Herb-6: Since price doesn’t explain the revenue trends you’ve seen recently, that’s the reason you want to build the demand model to see what other factors might explain demand for Katrina’s Candies new candy.

ECO550_1_6_Renee-7: Yes, absolutely. Managers make better decisions when the decisions are based upon the results of formalized models.  My thinking is that we need to build a model of the demand for our sugar free chocolate.

Let’s review the list of other determinants that might explain the demand for Katrina’s Candies sugar-free chocolate.  Can you identify those determinant categories?
ECO550_1_6_Herb-7: Sure, according to theories I studied, there are five basic categories of variables that affect consumer purchases.
ECO550_1_6_Renee-8: Let me write down the determinants as you say them. I want to make certain we don’t forget something later.
ECO550_1_6_Herb-8: Good thinking! These five categories consist of the price, income, prices of related goods, preference or tastes, and the number of buyers.

ECO550_1_6_Renee-9: Let’s see if there’s something on the internet we can use to verify that we selected the correct terms. Just in case our memories are fuzzy. (laughs)

ECO550_1_6_Herb-9: That sounds good to me. Let’s check it out!
ECO550_1_6_Renee-10: I’m still looking, did you find something?

ECO550_1_6_Herb-10: Yes, I think I found a YouTube video that’s pretty informative. Check it out on your iPad! Here’s the link.

Determinants of Demand

The price of the sugar-free chocolate;

The price of caffeinated coffee;

The price of water;

The median income of consumers; and

The number of buyers in the market.

ECO550_1_8_Renee-2: That’s a great model! We can even add or delete determinants, if necessary.
ECO550_1_8_Herb-3: Thank you, I’m glad my training from Strayer really came in handy working on this model.

ECO550_1_8_Renee-3: All right, I think this is a good place to stop for today.  I need to go to my office to review the model to make certain we’ve properly prepared everything. Then I need to speak with Maria, to let her know which data we need. Can you and I set a follow-up meeting for next week, same day and time?
ECO550_1_8_Herb-4:  Sounds good to me!

ECO550_1_8_Renee-4: Before we go I would like for you to go through some review materials that will really reinforce the key concepts we discussed this morning.

·        Revenue – the amount a firm receives from selling products; known formally as Total Revenue (TR) and calculated as price times quantity demanded (TR = PxQd)

·        Demand: http://www.youtube.com/watch?v=ZMYLgoCdZB4

·        Supply:http://www.youtube.com/watch?v=6Q_XxwqtwxY

·        Principal-Agent Problem: http://www.youtube.com/watch?v=uzS3F8MgbK0

Scenario-based and will use folder structure to present scenario, then have tabs to represent options for answers

Narrations will be provided for scenario overview and choices (feedback included as well)

On the way to the office about six months later, Joe heard a news report that 12 months into the future, twenty Fortune 500 companies were expected to expand executive personnel by an estimated 35 percent.  During the next week, Joe implemented plans to reduce the jar size as ABC’s Board had directed.

ECO550_1_10_Renee-2 (Option 1): In the provided scenario, Joe’s attitude about and disregard of the Board’s request was appropriate. CEO’s have complete responsibility for decision-making.  So although the Board oversees the CEO’s action, the Board over-stepped its authority by making the request.

Furthermore, Joe must have felt that maintaining the status quo of the company would not directly harm him in either the short or long run so he delayed implementing the request to show the Board who was actually in charge.

ECO550_1_10_Renee-3 (Incorrect feedback for Option 1): Keep in mind that the Board does hold authority over Joe. Please try again.

ECO550_1_10_Renee-4 (Option 2): In the provided scenario, Joe’s attitude about and disregard of the Board’s request was inappropriate.  Although Joe has more knowledge about market situations and superior decision-making skills, as CEO, Joe still had an obligation to follow the Board’s directive since the requested change would have improved ABC’s profits.  Joe’s decision to implement the request late was made without regard to personal impact.

ECO550_1_10_Renee-5 (Incorrect feedback for Option 2): Keep in mind that Joe considered the personal impact of ignoring the directive and six months later when he finally implemented the directive.  Please try again.

ECO550_1_10_Renee-6 (Option 3):In the provided scenario, Joe’s attitude about and disregard of the Board’s request was inappropriate.  Although Joe has more knowledge about market situations and superior decision-making skills, as CEO, Joe still had an obligation to follow the Board’s directive since the requested change would have improved ABC’s profits.

Although Joe may not have fully understood his role vis-à-vis the Board and ABC, Joe recognized that it was in his best interest to implement the request, after learning about the anticipated changes in the Fortune500’s demand for executives.

ECO550_1_10_Renee-7 (Correct feedback): Yes, Joe had an obligation to pursue strategies that would improve profits since he does report to the Board and is only an agent who is to act on behalf of ABC.

Additionally, Joe decided to implement the request because he had always wanted to work for a bigger Fortune 500 company and realized after hearing the news report that he needed ABC to be more profitable so he could include the successful outcome on his resume as an example of outstanding managerial skills.

ECO550_1_11_Herb-1: I then helped out by selecting five determinants to use for our demand model and we began developing data to assist Ken with his decision.

ECO550_1_11_Renee-2: You did a great job today Herb! I think we are definitely making progress on this project. I know Ken will be very happy with our results thus far. Until we meet again, don’t forget to complete your weekly threaded discussion questions based on the key concepts we covered this week. I’m now on my way to meet with Maria; we need to discuss our data needs.

ECO550_1_11_Herb-2: Thanks for working with me today Renee! You were very helpful and I’m excited to work on other parts of this project with you.

Take care!