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?
(a)
Steps for analyzing demand equation based on regression
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
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