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Question 1

What is an identification problem? How does it relate to the demand equation?

Question 2

Due to a shift in consumer taste, the demand curve for product X shifted steadily to the right. If one was to plot the price against quantity sold, would the resulting relationship approximate market demand curve? Explain.

Question 3

Describe leading economic indicators. What are important criticisms of forecasting ability of leading economic indicators?

Question 4

What are the four different characteristics that data exhibit when undertaking time-series forecasts?

Question 5

Explain the advantage of multiple regressions compared to simple regression.

Question 6

You are hired to analyze demand in 25 regional markets of product Z. Regression results of demand are given below. The numbers in parenthesis are standard errors.

Qz = 250 – 10P + 6PX + 0.25A + 0.04I

(100) (3) (2) (0.1) (0.15)

R2= 90%

Standard Error of the Estimate (s) = 75

Here, Qz is market demand for Product Z, P is the price of Z in dollars, A is dollars of advertising expenditures, PX is the average price in dollars of another (unidentified) product, and I is dollars of household income. In a typical market, the price of Z is $1,500, PX is $500, advertising expenditures are $50,000, and disposable income per household is $45,000.

Calculate the expected level of demand in a typical market.

Indicate the range within which actual demand is expected to fall with 95% confidence.

Question 7

The following questions refer to this regression equation, (standard errors in parentheses)

Q = 8,400 – 10 P + 5 A + 4 Px + 0.05 I,

(1.732) (2.29) (1.36) (1.75) 0.15)

R2 = 0.65

N = 120

F = 35.25

(Standard error of estimate) s = 34.3

Q = Quantity demanded

P = Price = 1,000

A = Advertising expenditures, in thousands = 40

PX = price of competitor’s good = 800

I = average monthly income = 4,000

Calculate the elasticity for each variable, and briefly comment on what information this gives you in each case.

Calculate t-statistics for each variable, and explain what this tells you.

How would you evaluate the quality of this equation overall? Do you have any concerns? Explain.

Should this firm be concerned if macroeconomic forecasters predict a recession? Explain.

Question 8

The demand equation for the Widget Company has been estimated to be:

Q = 20,000 + 10 I – 50P + 20 PC

Where Q = monthly number of widgets sold, I = average monthly income, P = price of widgets, and PC = average price of competing goods.

If next month’s income is forecast to be $2,000, the price of competing goods is forecast to be $20, and the price of widgets will be set at $30, forecast sales.

What will sales be if the price is dropped to $20?

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