Managerial economics 6 |


You have been presented with the following data and asked to fit statistical demand functions:

a.     Linear Relationship

                        i.         Identify the dependent and independent variables.

The dependent variable are sales

The independent variable are advertising expenses, selling price, and disposable income.

                      ii.         Estimate a linear relationship between the dependent variable and all the independent variables.

                     iii.         What are the tests that you would use to determine the ‘goodness-of-fit’ of the estimated demand function? Conduct the tests and explain the results.

                     iv.         Discuss the economic implications of the various coefficients.

                       v.         Compute the price elasticity of demand and income elasticity of demand in period 10. Elaborate your answers.

b.     Non-linear relationship

                        i.         Estimate a logarithmic form of the demand function.

                      ii.         Is the estimated demand function ‘good’? Explain your answer.

                     iii.         Compare with the linear form above. Elaborate.

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