Answer to Question #228062 in Macroeconomics for Emy

Question

Assume you are managing a firm that recently entered in the transportation service, which
is meter taxi service similar with Ride, Feres and others. If you have to estimate the
demand for the transportation service you provide, (6 marks)
a. What would be the explanatory variables you include in a regression model?
b. Indicate how you may utilize the results of your demand estimation for decision￾making.
c. How do you make your pricing decision?
d. What do you think is the market structure for meter taxi transportation in Addis? Give
your justifications

Answer 1

Solution:

a.). The explanatory variables that can be included in a regression model are price of the product, price of the substitute and complimentary products and level of income, all of which are independent variables. They are denoted by “X”.

 

b.). The demand estimation can be used to forecast or predict how demand for your goods or services will change in the near future. It can provide you with critical information regarding price and respective quantities the consumers are willing to demand. This can help you as a manager to make vital decisions with regards to production of products or purchasing in order to eliminate or reduce sunk costs and ensure growth is accounted for.

 

c.).  My pricing decision will depend on the current market demand levels, that is dynamic or surge pricing. This involves firms having flexible set prices for products and services based on current market demands.

 

d.). The market structure for meter taxi transportation in Addis is oligopoly. This is because the industry is dominated by a small number of large firms, selling identical or differentiated services, higher barriers of entry, and interdependence.