The Fast Food Drive-In has determined that demand for hamburgers is given by the
ID: 1217407 • Letter: T
Question
The Fast Food Drive-In has determined that demand for hamburgers is given by the following equation: Q = 205.2 + 23.0A - 200.0PM + 100.0Pc + 0.5
1.85) (2.64) (-5.61) (2.02) (4.25)
Where Q is the number of hamburgers sold per month (in l,OOOs), A is the advertising expenditures during the previous month (in $1,000s), PM is the price of Fast Food burgers (in dollars), Pc is the price of hamburgers of the company's major competitor (in dQllars), and I is income per capita in the surrounding
community (in $1,000s). The t-statistic for each coefficient is shown in parenthesis below each coefficient.
(i) Are the signs of the individual coefficients consistent with predictions from economic theory? Give reasons for each coefficient.
(ii) Interpret the meaning of the slope coefficients for PM, Pc and I. If A = $5,000, PM = $1, Pc = $1.20, and I = $20,000, how many hamburgers will be sold?
(iii) What is the advertising elasticity when A = $5,000.
Explanation / Answer
1. As the advertising expenditure in the previous month increases, the quantity demanded of hamburgers will increase. As the price of the hamburgers of the company's major competitor will increase the quantity demanded of the hamburgers will increase. As the income per capita increases, the quantity demanded of hamburgers will increase.As the price of fast food burgers increase, the quantity demanded of hamburgers will decline.
2. Pc - As the price of the fast food burgers increase by 1 unit, the quantity demanded of hamburgers will decrease by 200 units.
Pm - As the price of the hamburgers of the company's major competitor increase by 1 unit, the quantity demanded of the hamburgers will increase by 100 units.
I - If income per capita increases by 1 unit, the quantity demanded of hamburgers will increase by 0.5 units.
Q = 205.2 + 23 * 5000 - 200 * 1 + 100 * 1.20 + 0.50 * 20,000
= 125125.2 units
3. When A = 5000, Advertising elasticity =
23 * 5000 / 125125.2 = 0.92
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