Answer to Question #290853 in Economics of Enterprise for addis

Question

The demand for Habesha beer in Addis Ababa is hypothesized to be determined by price of beer (PRICE), Price of all other goods (OTHERSPR), Income (INC) and per capita advertising (ADVERT). And the OLS estimation result is given by

DD= -5463+0.3643 PRICE-0.15439 OTHERPR+0.8892 INC+0.0831 ADVERT

(11.2225)(1.7141)(1.0895)(6.7752)(2.6327)

R^2=0.950

DW statistics=1.716

a. Interpret the estimation result

b. What is the meaning of the R2?

c. What will happen to the demand of Habesha beer if the average income of the community is increased by 1000 birr?

Answer 1

Qn. A

DD= -5463+0.3643 PRICE-0.15439 OTHERPR+0.8892 INC+0.0831 ADVERT

DD which is the demand, is given by the equation shown above, where -5463 is the gradient of the equation as a constant, +0.6343 is the coefficient of Price, -0.15439 the coefficient of OTHRPR, +0.8892 coefficient of income and +0.0831 the coefficient of per capita advertising.

Qn. B

The r squared in the OLS estimation signifies the dependence shown in percentage of the dependent variables as explained by the independent variable.

Qn. C

Taking demand of Habesha beer as in the given equation, and assuming the initial values of PRICE, OTHRPR, INC and ADVERT to be equal to one each we get;

DD= -5463+0.3643(1) -0.15439(1) +0.8892(1) +0.0831(1)

DD=-5461.81779

Increasing income by 1000birr, new income =

Replacing the value of income in the initial demand equation we get;

DD= -5463+0.3643(1) -0.15439(1) +0.8892(1001) +0.0831(1)

DD=-4572.61779

To see the effect, we take the difference

DD=-5461.81779+4572.61779

DD=-889.2

The demand of Habesha beer increases with increase in income for the community.