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.