Exam 5: Demand Estimation

Heteroskedasticity is produced by:

A. Demand estimation is made difficult by the fact that customer self-interest often mitigates against the accuracy of demand information gained through consumer interviews. B. Customers are often more clear about their method of product selection than they are about the actual products selected. C. A positive relation between product demand and price is a natural byproduct of falling advertising expenditures. D. Providing suppliers with demand information can have the effect of reducing the price effect of an anticipated increase in demand. E. If suppliers operate in an industry facing increasing average costs, an increase in productive capacity leads to an increase in the quantity demanded.

Tests of the b = 0 hypothesis are:

Demand Curve Estimation. The Real Kool Toys Company manufactures and sells educational toys. An empirical demand function for one of the firm's products has been estimated over the last 21 quarters using regression analysis. The estimated demand function is: Standard Error of the Estimate = 1,000 Here Q_Y is quantity (measured in units) of Product Y demanded in the current period, A is hundreds of dollars of advertising ($00), I is thousands of dollars of disposable income per capita ($000), and P_X is the price ($) of another toy manufactured by a competitor, ABC Toys. The terms in parentheses are the standard errors of the coefficients.

A deterministic relation is:

In a multiplicative demand model, the income elasticity of demand can be influenced by:

R² and t statistics. Boris Yeltsin Products, Inc., has hired you to analyze demand in 30 regional markets for Product Y, a new vodka beverage. A statistical analysis of demand in these markets shows (standard errors in parentheses): Standard Error of the Estimate = 20 Here, Q_Y is market demand for Product Y, P is the price of Y in dollars, A is dollars of advertising expenditures, P_X is the average price in dollars of another (unidentified) product, and I is dollars of household income. In a typical market, the price of Y is $500, P_X is $600, advertising expenditures are $10,000, and average per capita income is $40,000.

The number of observations beyond the minimum needed to calculate a given regression statistic is called:

Correlation and Simple Regression. Test Markets, Inc., has conducted a survey to learn the income characteristics of an n = 10 sample of construction workers. The survey asked worker his or her annual income and number of years work experience. Survey results are: The regression equation is: INCOME = 13325 + 4497 EXPERIENCE

z-Statistics. Fantastic Footwear, Inc., of Freeport, Maine, has retained you to aid the firm in an evaluation of its marketing strategy. Fantastic Footwear shoes are marketed through "factory outlet" malls located along the eastern seaboard. A move to extend the company's market to Midwestern and Western states is currently being contemplated. A marketing research group conducted an empirical analysis of demand for the company's shoes during 2008 in twenty regional markets and found the following (standard errors in parentheses): Standard error of the estimate = 500 where Q = quantity sold (in pairs of shoes), P = price (in dollars), P_X is the average price of shoes in competitor stores, and M is the distance in miles to the nearest competing factory outlet mall. Champaign-Urbana, Illinois is a potential Midwestern market with economic characteristics typical of those eastern markets included in the empirical analysis. In Champaign-Urbana, expected levels are: P = $60, P_X = $80 and M = 200 miles.

A. If $x=1$ , there is a perfect direct line ar relation between the dependent $Y$ variable and the independent $X$ variable. B. $\quad R^{2}$ is the proportion of total variation in the independent variables that is explained by the dependent variable. C. $\mathrm{R}^{2}=75$ when a given regression model is unable to explain $25 \%$ of the variation in the dependent $Y$ variable. D. When a simple regression model is unable to explain $19 \%$ of demand variation, the coefficient of correlation equals $90 \%$ . E. In a simple regression model with only one independent variable, the correlation coefficient falls in the range between 1 and 0

If a decrease in price causes total revenue to increase, an estimate of the absolute value of the price elasticity of demand will be:

A decrease in demand can be expected following:

Regression Statistics. Financial Planning Associates, Ltd., has hired you to analyze demand in 30 regional markets for custom financial plans for high net worth individuals (Product Y). A statistical analysis of demand in these markets shows (standard errors in parentheses): Standard Error of the Estimate = 5 Here, Q_Y is market demand for Product Y, P is the price of Y in dollars, A is dollars of advertising expenditures, P_X is the average price in dollars of another (unidentified) product, and I is dollars of household income. In a typical market, the price of Y is $2,000, P_X is $1,000, advertising expenditures are $120,000, and average family income is $200,000.

Price Elasticity Estimation. Thomas Magnum, a financial analyst for Detroit Wheels, Inc., has been hired to analyze demand in 20 regional markets for Product Y, a major item. A statistical analysis of demand in these markets shows (standard errors in parentheses): Standard Error of the Estimate = 10 Here, Q_Y is market demand for Product Y, P is the price of Y in dollars, A is dollars of advertising expenditures, P_X is the average price in dollars of another (unidentified) product, and I is dollars of household income. In a typical market, the price of Y is $100, P_X is $75, advertising expenditures are $50,000, and average family income is $80,000.

Endogenous determinants of demand include:

One-tail t tests. A study of the demand for imported motorcycles recently appeared in an industry newsletter. According to the study, demand for motorcycle imports is described by the function: Standard error of the estimate = 30 Here Q_Y is the quantity of motorcycles imported (000), P_Y is average motorcycle price ($), P_X is the average price of imported compact cars, A_Y is motorcycle industry advertising ($000,000), A_X is industry advertising of compact cars ($000,000), and I is average disposable family income ($000). The standard errors of the exponents in the multiplicative demand function above are: And finally, this demand function was estimated using two years of monthly data (24 observations).

If P₁ = $5, Q₁ = 10,000, P₂ = $6 and Q₂ = 5,000, then a linear estimate of the demand curve is:

A multiple regression model necessarily involves:

Elasticity Estimation. Breakaway Tours, Inc., has estimated the following multiplicative demand function for packaged holiday tours in the Flushing, New York, market using quarterly data covering the past five years (20 observations): Standard Error of the Estimate = 10. Here, Q_y is the quantity of tours sold, P_y is average tour price, P_x is average price for some other good, A_y is tour advertising, A_x is advertising of some other good, and I is per capita disposable income. The standard errors of the exponents in the preceding multiplicative demand function are