1. Researcher has estimated the following model in STATA, where Sales is a sales
ID: 3356516 • Letter: 1
Question
1. Researcher has estimated the following model in STATA, where Sales is a sales revenue (measured in $1000), Price of a product is measured in $1, and Advert is advertisement expenditure measured in $1000. · reg sales price advert Source df MS Niber of obs· F( 2, 72)= Prob > F.09 75 29.25 Model 1396.53921 2 698.269603 Residual 1718.9428172 23.8742057 R-squared.4483 Adj R-squared . .4329 Root NSE4.8861 Total 3115.48282 74 42.101183 sales Coef. Std. Err. t Pt 195% Conf. Intervall price7.907856 1.9959937.22 .000 -10.09268 -3.723034 advert 1.862584 .6831955 2.735906587 3.224509 _cons! 118.9136 6.351638 18.72 ..00· 106,2519 in,5754 · ostat vce Covariance matrix of coefficients of regress model price advert cons price1.2012009 advert 0197421646675603 .cons-6.7958657484205 40.343384 a) Write down the population regression model. b) Provide the interpretation for price coefficient c) Provide the interpretation for advertisement coefficient. d) Test the hypothesis if price elasticity of demand is elastic. e) Notice to increase Sales Revenue we need to either reduce price of a product or to increase the advertisement cost. The marketing analyst believes that if we reduce price by 40 cents ($0.4) and increase advertisement costs by $800, the sales revenue would on average increase by $4000. Please conduct a hypothesis test for his claim.Explanation / Answer
a) Y = -7.987856*price + 1.862584* Advert + 11.9136*_cons
b) As sales increase by 1 the price decrease by 7.987856
c) As sales increase by 1 the advertisement coefficient increase by 1.862584
d) Since p-value for price is 0.000 i.e. less than 0.05 we reject Ho and conclude it is not elastic.
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