1. The following linear demand specification is estimated for Conlan Enterprises

Question

1. The following linear demand specification is estimated for Conlan Enterprises, a price-setting firm wbere Q is the quantity demanded of the product Conlan Enterprises sells, P is the price of that product, M is income, and Ppis the price of a related product. The results of the estimation are presented below: DEPENDENT VARIABLE: Q R-SQUARE F-RATIO P-VALUE ON F 0.7984 PARAMETER ESTIMATE 846.30 -8.60 0.0184 -4.3075 OBSERVATIONS: 32 36.14 0.0001 STANDARD T-RATIO 11.03 -3.31 3.83 -3.50 P-VALUE 0.0001 0.0026 0.0007 0.0016 VARIABLE ERROR 76.70 2.60 0.0048 1.230 INTERCEPT PR Assume that the income is $10,000, the price of the related good is $40, and Conlan chooses to set the price of this product at $30. At the prices and income given above, Conlan can expect to sell units

Explanation / Answer

The given linear demand function is:

Q= a+bP+cM+dPR

Here, P is the price of the product given as $30

M is the income given as $10,000

PR is the price of the related product given as $40.

And, from the estimation results table, we have:

Parameter estimate for intercept a= 846.30,

Parameter estimate for P (i.e b)= -8.60

Parameter estimate for M (i.e. c)= 0.0184

Parameter estimate for PR (i.e. d)= -4.3075

Hence as per the demand function, the number of Units than Conlan can expect to sell:

Q = 846.30 – 8.60P + 0.0184M – 4.3075PR

Q = 846.30 – 8.60 (30) + 0.0184 (10000) – 4.3075 (40)

Q = 846.30 – 258 + 184 – 172.3

Q = 600

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