Question
KAD has estimated the following demand relationship for its product over the last four years, using monthly observations: ln Qt = 4.932- 1.238 ln Pt
KAD has estimated the following demand relationship for its product
over the last four years, using monthly observations: ln Qt = 4.932- 1.238 ln Pt + 1.524 ln Yt-1 + 0.4865ln Qt-1 (2.54) (1.38) (3.65) (2.87)
R 2= 0.8738
where Q = sales in units, P = price in Rs., Y is income in Rs,000, and the numbers in brackets are t-statistics.
a. Interpret the above model.
b. Make a sales forecast if price is Rs. 9, income last month was Rs. 25,000 and sales last month were 2,981 units.
c. Make a sales forecast for the following month if there is no change in price or income. d. If price is increased by 5 per cent in general terms, estimate the effect on sales, stating any assumptions.
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