Assignment 1: Demand Estimation

Due Week 3 and worth 200 points

Imagine that you work for the maker of a leading brand of low-calorie, frozen microwavable food that estimates the following demand equation for its product using data from 26 supermarkets around the country for the month of April.

For a refresher on independent and dependent variables, please go to Sophia’s Website and review the Independent and Dependent Variables tutorial, located at http://www.sophia.org/tutorials/independent-and-dependent-variables–3.

Option 1

Note: The following is a regression equation. Standard errors are in parentheses for the demand for widgets.

QD       =          – 5200 – 42P + 20PX + 5.2I + 0.20A + 0.25M

(2.002)  (17.5) (6.2)    (2.5)   (0.09)   (0.21)

R2 = 0.55           n = 26               F = 4.88

Your supervisor has asked you to compute the elasticities for each independent variable. Assume the following values for the independent variables:

Q          =          Quantity demanded of 3-pack units

P (in cents)       =          Price of the product = 500 cents per 3-pack unit

PX (in cents)     =          Price of leading competitor’s product = 600 cents per 3-pack unit

I (in dollars)       =          Per capita income of the standard metropolitan statistical area

(SMSA) in which the supermarkets are located = $5,500

A (in dollars)     =          Monthly advertising expenditures = $10,000

M                     =          Number of microwave ovens sold in