Your high-powered economic consultant had conducted a study of the demand for yo
ID: 3176405 • Letter: Y
Question
Your high-powered economic consultant had conducted a study of the demand for your product and measured the following regression relationship between quantity (Q) sold in thousands of units and price (P), income (M) and customer age in years (A): Q = 14 - 5.4P + 0.05M - .07A What direction (increase or decrease) will quantity change if you raise your price? If the economy goes into recession and incomes fall, what will happen to quantity sold (increase or decrease)? For each increase in a customer's age by one year, all other things unchanged, what will happen to quantity sold (increase or decrease)? If the company president asks you who the target audience for their product is, what would you recommend: 1) try to sell to older people or 2) try sell to younger people?Explanation / Answer
Given equation: Q = 14 - 5.4P + 0.05M - 0.07A
a) The coefficient of price is - 5.4. This indicates that the quantity sold decreases by 5400 units for every one unit increase in price. Hence,
Quantity will decrease as we increase the price.
b) The coefficient of income is + 0.05. This indicates that quantity sold increases by 50 units for every 1 unit increase in the income.
Hence,
If the income will fall, quantity sold will decrease.
c) The coefficient of age is - 0.07. This indicates that quantity sold decreases by 70 units for every 1 unit increase in age.
Therefore,
For each increase in the customer's age by 1 year, quantity sold decreases by 70 units.
From this, we can say that the audience for the product would be younger customers because quantity sold decreases with the increase in customer age. So, company should try to sell to younger people.
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