Note- while this question doesn\'t make you run the regression, play with the pi

Question

Note- while this question doesn't make you run the regression, play with the pizza data and mak be- low comes from and how to interpret the p-vales (in the use t-stats, same thing, I just told you about p-values, so I made up a few below for you to interpret) crowavable food estimated the following demand equation for its product using data from 26 supermarkets around the country for the month of April: Q-5200 -42P+ 20P + 5.20.20A + 0.25M. Assume e sure you know where the equation provided The maker of a leading brand of 1 ow-calorie mi- p 0.11 P=0.0069 p=0.052 p=0.0642 p=0.3425 p=0.2567

Explanation / Answer

Q = - 5200 - 42P + (20 x 600) + (5.2 x 5500) + (0.2 x 10000) + (0.25 x 5000)

Q = - 5200 - 42P + 12000 + 28600 + 2000 + 1250

Q = 38650 - 42P

(a) When P = 500, Q = 38650 - (42 x 500) = 38650 - 21000 = 17650

(i) Own price elasticity = (dQ / dP) x (P / Q) = - 42 x (500 / 17650) = - 1.19

(ii) Income elasticity = (dQ / dI) x (I / Q) = 5.2 x (5500 / 17650) = 1.62

(iii) Cross-price elasticity with competitor = (dQ / dPx) x (Px / Q) = 20 x (600 / 17650) = 0.68

(iv) Advertising elasticity = (dQ / dA) x (A / Q) = 0.2 x (10000 / 17650) = 0.11

(v) Elasticity with other microwaves = (dQ / dM) x (M / Q) = 0.25 x (5000 / 17650) = 0.07

(b) Absolute value of own price elasticity is 1.19 which is higher than 1, so demand is elastic. With elastic demand, a price cut will increase total revenue and increase market share.

(c) A variable is statistically significant if its p-value is lower than 0.05. Out of given variables this condition is satisfied only for own pricce, substitute price and income, so these 3 are statistically significant.

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