Question

Assume Demand equation of a product as Q = 70 -10 P + 4Pr + 50 I

Where

Q = Quantity of the product demanded, P = Price of the product (in $),

Pr = Price of the related product (in $) and I = Per capita income (in ‘000)

a.     State the key steps for analyzing the above demand equation and calculate the regression results.

b.     What are the implications of the above regression analysis for management decisions?

Answer 1

(a)

Steps for analyzing demand equation based on regression

1. Specification of the regression model of demand
2. collection of the relevant data
3. Obtain data on variables estimation
4. Estimate parameters
5. Interpret results

Regression results

$Y=a+bx_1+bx_2+dx_3$

From the equation, Q = 70 -10 P + 4Pr + 50 I

Q=dependent variable

70=Intercept

P, Pr and I = independent variable

10, 4, 50 = slopes

(b)

P$\implies$ decrease in price results in decrease in demand

Pr$\implies$ Increase in complementary product demand

$I \implies$ Increase in income shows product is inferior