15. inferring competitor’s cost Ralph is considering entering the custom E-mail device market. His device is customizable and will operate across a variety of systems.

Before proceeding, Ralph decides to appraise the competition. The closest is Enterprise Products (or EP). EP markets a similar product, though it lacks the versatility of Ralph’s design. A consultant gathers recent data from EP’s financials and reports the following regression that relates reported cost of goods sold (cgs) to units sold

(qs) for the EP product: cgs = 938, 248+59qs. (This is an excellent statistical fit to the underlying data.) Ralph is ecstatic, as the estimated variable cost of 59 per unit is well above Ralph’s variable cost of 42 per unit. Alas, the next day Ralph accidentally sees a confidential cost analysis prepared by the accounting group at EP. Their report includes the following regression of total production cost (tpc)

on units produced (qp): tpc = 2, 230, 207 + 43qp. Carefully explain the difference between the two regressions.