LKA Associates, Ltd., has hired you to analyze demand in 30 regional markets for Product Y, a major item. A statistical analysis of demand in these markets shows (standard errors in parentheses):

Q_Y = 2,000 - 5P - 2.5P_X + 0.0825A + 0.025I

(1,000)(1.5) (1.2) (0.05) (0.01)

R² = 0.96

F = 23.8

Standard Error of the Estimate = 5

Here, Q_Y is market demand for Product Y, P is the price of Y in dollars, A is dollars of advertising expenditures, P_X is the average price in dollars of anotherproduct, and I is dollars of household income.

In a typical market, the price of Y is $2,000, P_X is $1,000, advertising expenditures are $120,000, and average family income is $40,000.

a. Briefly interpret the demand equation and explain the use of the regression statistics provided.

b. Can you determine at the 95% confidence level whether X is a complement or a substitute? Why or why not? If so, which is it?

c. Use the estimated demand function to calculate the expected value of Q_Y in a typical market. Also calculate the 95% confidence interval within which you would expect to find the actual values of sales.

d. Calculate the point price elasticity of demand. Would a reduction in price result in an increase in total revenues? Why? or Why not?