Wednesday

April 23, 2014

April 23, 2014

Posted by **Darl** on Thursday, September 15, 2011 at 2:08am.

Your new boss, Sarah, gives you a copy of an Excel spreadsheet containing data collected last year on FitCo’s 24 existing clubs. She asks you to use the data to complete the following important and time-sensitive tasks:

1. Estimate an empirical demand function for one-month memberships using the data gathered from the firm’s 24 clubs. (Assume the demand function is linear. Further assume that the only variables likely to significantly affect the demand for one-month memberships are price, average income, and the size of the town’s population.)

2. Interpret the estimated demand function for one-month memberships.

3. Calculate the point price elasticity of demand and point income elasticity of demand in Town D at the price charged last year.

4. For Town H and Town W determine whether the price charged last year was above, below or equal to the profit-maximizing price.

5. FitCo is considering opening a 25th club. The company must choose between one of two towns in which to locate the new club. Both towns have populations of 22,000. However, one of the towns has a relatively high average income of $60,000, while the other has a relatively low average income of $45,000. The annual fixed costs of running the club in the high income town would be about $160,000, while annual fixed costs of running the club in the low income town would be about $70,000. Your job is to select the site for the 25th club and to determine the appropriate price for the one-month memberships.

6. Write a short report summarizing the results of the analysis and any recommendations.

She tells you that her formal knowledge of mathematics, economics, and statistics is somewhat limited, and asks you to keep that in mind as you write the main body of the report. Nevertheless, your conclusions and recommendations must be based on a rigorous analysis of the available data and you should provide a concise summary of any technical details

in an appendix. Sarah also tells you to be explicit about any important limitations your analysis

might have.

Data for FitCo Clubs in 2008

Price (P) Demand (Q) Income (M) Population (N) Revenue Fixed cost Profit

Town A $62 2875 $42,000 24000 $178,250 $101,000 $77,250

Town B $57 2908 $35,000 30000 $165,756 $64,000 $101,756

Town C $84 3472 $65,000 25000 $291,648 $137,000 $154,648

Town D $63 3263 $45,000 28000 $205,569 $107,000 $98,569

Town E $60 2823 $38,000 19000 $169,380 $77,000 $92,380

Town F $46 2502 $26,000 22000 $115,092 $61,000 $54,092

Town G $64 2977 $37,000 31000 $190,528 $68,000 $122,528

Town H $58 3309 $41,000 28000 $191,922 $78,000 $113,922

Town I $63 2596 $44,000 17000 $163,548 $70,000 $93,548

Town J $55 2517 $29,000 26000 $138,435 $52,000 $86,435

Town K $83 3542 $68,000 13000 $293,986 $166,000 $127,986

Town L $61 3132 $50,000 12000 $191,052 $113,000 $78,052

Town M $52 2467 $27,000 23000 $128,284 $32,000 $96,284

Town N $66 3881 $51,000 32000 $256,146 $89,000 $167,146

Town O $60 2882 $42,000 21000 $172,920 $66,000 $106,920

Town P $78 3629 $56,000 37000 $283,062 $125,000 $158,062

Town Q $46 2931 $32,000 15000 $134,826 $67,000 $67,826

Town R $55 2630 $28,000 28000 $144,650 $40,000 $104,650

Town S $55 3381 $41,000 18000 $185,955 $66,000 $119,955

Town T $30 4643 $41,000 23000 $139,290 $84,000 $55,290

Town U $41 4945 $56,000 26000 $202,745 $114,000 $88,745

Town V $28 4784 $37,000 32000 $133,952 $56,000 $77,952

Town W $22 3311 $24,000 24000 $72,842 $36,000 $36,842

Town X $43 4066 $42,000 18000 $174,838 $96,000 $78,838

How do I calculate part 4 and 5?

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