Managerial Eco

Boutaina Berrada

Sophia Berriane

ECO 5305

Homework 3 (Chapter 5):

1- Elasticity of each variable:

First, we find Qd= 24,850 units

- Price elasticity = -10 *(7,000/66,000) = -1.06

So, demand is elastic and for each decrease of 1% in price, there is an increase of 1.06% in quantity demanded.

- Advertising elasticity = 1500 *(54/66,000) = 1.23

So, for each 1% increase in advertising expense there will be a 1.23 % increase in quantity demanded.

- Cross elasticity = 4 *(8000/66,000) = 0.48

Since cross-elasticity> 0, this means that the products are substitutes

- Income elasticity = 2* (4000/66,000) = 0.12

This means that the the product is a normal good but non-cyclical.

2- t-statistics for each variable:

- t for Price: 10 / 2.29 = 4.37

- t for Advertising: 1500 / 525 = 2.86

- t for Competitor's price: 4 / 1.75 = 2.29

- t for Income: 2 / 1.5 = 1.33

Except income, all independent variables are significant. Thus, all the other variables have an effect on the quantity demanded.

3- R2 value:

R2 = RSS/TSS = 1 - (ESS/TSS)

TSS = sum of squared deviations of the sample values of Y from their mean

RSS = sum of squared deviations of the estimated values