Bob’s Underground, a limited liability corporation specializing in new rap artists (B.U. LLC, rap) has the following demand function:Q=a+bP+cM+dRQ=◂+▸a+b⁢P+c⁢M+d⁢Rwhere QQ is the quantity

Bob’s Underground, a limited liability corporation specializing in new rap artists (B.U. LLC, rap) has the following demand function:


where QQ is the quantity demanded of the most popular product B.U. sells, PP is the price of that product, MM is income, and RR is the price of a related product.  The regression results are: 

Adjusted R2R2  0.7711

Independent VariablesCoefficientsStandard Errort-statP-value





Question 1

Do you think these regression results will generate good sales estimates for B.U. LLC, rap?

Select one:

a. Yes; the parameter estimates have expected signs, the individual coefficients (besides the intercept) are statistically significant at the 5% level, and the R2R2 is high.

b. Yes, except that the R2R2 is too low to be convincing. The rest of the results (p-values, expected signs) are satisfactory.

c. No; the estimated coefficient for R2R2 should be positive, not negative.

d. No; though the R2R2 is good and the variables have the expected signs, the estimated coefficients are not statistically significant at the 10% level.


Now assume that the income is $35,000, the price of the related good is $17, and B.U. chooses to set the price of its product at $15.

Question 2

What is the estimated number of units sold given the data above? (Round to the nearest single unit; i.e., no decimals).

Answer: _________________?

Question 3

What are the values for the own-price (EE), income (EMEM), and cross-price (EXR◂◽.▸EX⁢R) elasticities?

Select one:

a. E=−0.23E=−0.23, EM=−1.67◂=▸EM=−1.67, EXR=1.21◂◽.▸EX⁢R=1.21

b. E=−0.385E=−0.385, EM=1.237EM=1.237, EXR=0.295◂◽.▸EX⁢R=0.295

c. E=−1.22E=−1.22, EM=2.09EM=2.09, EXR=−0.87◂◽.▸EX⁢R=−0.87

d. E=−4.582E=−4.582, EM=0.0063EM=◂#▸0.0063, EXR=3.085◂◽.▸EX⁢R=3.085

Question 4

If PP increases by 4%, what would happen (in percentage terms) to quantity demanded?

Select one:

a. QQ changes by 4%×−0.386=−1.54%4%◂=▸×−0.386=−1.54%

b. QQ decreases by 4%4%.

c. QQ decreases by 0.478%0.478%.

d. QQ increases by 4%×−4.582=−0.183%4%◂=▸×−4.582=−0.183%

Question 5

If MM increases by 3%, what would happen (in percentage terms) to quantity demanded?

Select one:

a. QQ increases by 3%×3%=0.09%◂,▸3%×3%=0.09%.

b. QQ falls by 0.6%.

c. QQ increases by 3%×1.239=3.72%◂,▸3%×1.239=3.72%.

d. QQ decreases by 3%×−0.478=−0.0143%◂=▸×−0.478=−0.014.

Question 6

If RR decreases by 5%, what would happen (in percentage terms) to quantity demanded?

Select one:

a. QQ falls by 1.48%.

b. QQ falls by 5%×3.085=0.154%◂,▸5%×3.085=0.154%.

c. QQ decreases by 6.22%.

d. QQ increases by 28.4%.

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