Calculate the point price elasticity of demand, Basic Statistics

Bambridge Associates LLP has hired you to analyze the demand in 30 regional markets for custom financial plans for high net worth individuals (Y). A statistical analysis of demand in these markets shows the following, (standard errors in parentheses)

Qy= 2,000 - 5P -2.5Px +0.0825A +0.005I

(1,000) (1.5) (1.2) (0.05) (0.002)

R squared = 0.96

Standard Error of the Estimate=5


Herein Qy ismarket demand for Product Y; P is the price of Y in dollars. A is dollars of advertising expenditures, Px is the price of another unidentified product and I is dollars of household income. In a typical market the price of Y is $2,000, Px is $1,000, advertising expenditures are $120,000 and average family income is $200,000.

a)Interpret this demand equation explaining each of the values of the regression statistics provided.

b) Can you establish whether the Px variable is a complement or substitute? Which is it? What does that mean to you as a decision maker?

c) Use the estimated demand function to calculate the expected value of Qy, in a typical market.

d) Calculate the point price elasticity of demand. Would a reduction in the price result in an increase in total revenues? Why or why not?

e) Write a summary of your impression as to the use value of this regression and what you might do to increase its explanatory power.

Posted Date: 3/15/2013 3:07:56 AM | Location : United States

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