III. Apple Turnovers: Demand Estimation & Forecasting 40 pts

Suppose Sara Lee estimates the following demand equation for its Apple Turnovers using data from stores for September 2022:

Q = - 5200 21 Px + 20 Py + 5.2 Inc + 0.80 A - 2.25M ; R² = 0. 46

(2.002) (17.5) (6.2) (2.4) (0.59) (1.21)

Standard errors in parentheses.

Assume the following values for the independent variables:

Q = Quantity of Sara Lees Apple Turnovers sold per month

Px (in cents) = 400

Py (in cents) = Price of Pepperidge Farms Apple Turnovers = 500

Y (in dollars) = Per Capita monthly Income of the trade area in which the store is located = 9500

A (in dollars) = Monthly advertising expenditure = 2000

M = Total microwave ovens where the store is located = 2000

Using this information (Hint: use example in the text (P. 117-122)

a. Compute elasticities for each variables price, cross-price (2), income, advertising and make interpretation of each of them as spelled out in the textbook

b. Should Sara Lee be concerned about the impact of a recession? Why?

c. Should Sara Lee reduce its price to increase market share? Why or why not? Explain

d. Calculate the t values and indicate which regression coefficients are statistically significant. Offer some explanations

e. What does R² mean? Identify a couple of variables which can lead to a possibly rise in R² Use realistic examples giving justifications.