The answer to Regression Model
1. Assume that the demand for bottled water is price inelastic. Are the following statements true or false? Explain.
a. When the price of bottled water decreases, the quantity sold increases.
b. The percentage change in the price of bottled water is less than the percentage change in quantity demanded.
c. Changes in the price of bottled water do not affect the number of bottled water sales.
d. Quantity demanded is non responsive to changes in price.
e. If more bottled water is sold, expenditures on bottled water will increase.
f. At this point the marginal revenue of bottled water is negative.
2. A manufacturer of computer workstations gathered average monthly sales figures from its 56 branch offices and dealerships across the country and estimated the following demand for its product:
Q = 24,750 - 4.6 P + 255A + 0.48Ppc + 0.56 Pm + 0.38 Pc
(8,688) (2.1) (296) (0.2) (0.29) (0.22)
The number in parenthesis indicates the standard errors of the parameters. The variables and their assumed values are:
Variable
Variable Name
Value
Q
Quantity
P
Price of basic model
11,550
A
Advertising expenditure (in thousands)
86
Ppc
Average price of a personal computer
6,800
Pm
Average price of a microcomputer
26,000
Pc
Average price of a leading competitor's workstation
13,200
a. Compute the elasticities for each of the variables. On this basis, discuss the relative impact that each variable has on the demand. What implications do these results have for the firm's marketing and pricing policies
b. Conduct a t-test for the statistical significance of each variable; state whether a one- tail test or two-tail test is required. What difference, if any, does it make to use a one-tail versus a two-tail test on the results? Discuss the results of the t-tests in light of the policy implications mentioned.
c. Suppose a manager evaluating these results suggests that interest rates and the performance of the computer (typically measured in millions of instructions per second, or MIPS) are important determinants of the demand for workstations and must therefore be included in the study. How would you respond to this suggestion? Elaborate.