Lorena Bob estimates the demand for Cleavers , a new cutting device, dubbed product x:
Qdx = a – b Px + c Py + d I + e AD
She creates a worksheet in EXCEL with 5 columns: Qdx, Px, Py, I, AD. Here Qd x is the demand for x, P x is the price of x, P y is the average price in dollars of another product Y, and I is dollars of household income and AD is total advertising expenditure for x.
In a typical market, the Px is $ 100, Py is $ 50, average family income is $ 40,000, and AD equals $ 1,000. A portion of the Excel output is reproduced below.
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.97757806
R Square 0.9400000
Adjusted R Square 0.930000
Standard Error 40
Observations 25
ANOVA D SS MS F Signific F
Regression 2 1.593277 0.796638 226.3004 6.19E-15
Residual 23 0.0739257 0.00352
Total 25 1.6672026
Coefficients STD Error
Intercept 2000 1596.0
X Variable 1 -0.25 5
X Variable 2 10 4
X Variable 3 1.5 0.022
X Variable 4 10 0.5
1. Write down the equation that was estimated in EXCEL.
2. Given the initial values, predict the level of sales in this market. Derive a 95% confidence interval around this prediction.
3. Use the initial values to calculate and interpret the following entities:
a. own price elasticity of demand for x.
b. cross price elasticity of demand between x and y.
