PROBLEMS N0. 3: A manufacturer of computer workstations gathered average monthly sales figures from its 56 branch offices and dealerships across the country and estimated the following demand for its product: Q = +15,000 - 2.80P + 150A + 0.3P,,, + 0 .35P,, + 0.290 (5.234) (1.29) (175) (0.12) (0.17) (0.13) R2 = 0.68; SEE = 786; F = 21.25 The variables and their assumed values are: Q 2 quantity; P = price of basic model=7,000; A = advertising expenditures (in thousands) = 52; F'PC = average price of a personal computer = 4,000 Pm =average price of a minicomputer = 15,000 PC = average price of a leading competitor's workstation = 8,000... a. compute the elasticities for each variable. On this basis, discuss the relative impact that each variable has on the demand. What implications do these results have forthe firm's marketing and pricing policies? b. conduct a ttest for the statistical significance of each variable... Discuss the results of the t-test in light of the policy implications mentioned. c. Suppose a manager evaluating these results suggests that interest rates and the performance of the computer (typically measured in millions of instructions per second, or MIPS) are important determinants of the demand for workstations and must therefore be included in the study. How would you respond to this suggestion? Elaborate. ANSWER: Suggested by authors... Q = +15,000 2.80P + 150A + 0.3P,c +0 .35Pm + 0.2Pc = +15,000 - 2.80(7,000) + 150(52) + 0.3(4,000) + 0.35(15,000) + 0.2(8,000) = +15,000 - 19,500 +7,800 + 1200 + 5,250 + 1,600 = 11,250 a. EP = 19 600 = -1.74 11,250 EA 2 7,800 = 0.69 11,250 2...: = 1,200 11,250 1,600 = 0.47 11,250 EC = 1,200 11,250 0.10 EM 0.14 According to the regression results, the key variable is price. The price of a minicomputer does seem to have some impact on the workstation's sales (i.e., cross elasticity = 0.47) but the results indicate that the price of the PC as well as the competitor's price does not appear to have much of an impact. The results indicate that customers are extremely price sensitive. Therefore, the firm should be very careful about how it prices the product. If it also happens to be selling PCs and minicomputers, then the prices of these products do not seem to have much of an impact on the sales of its workstations. However, it is quite possible that a price