QUESTION 2

The demand for Alpha oven toaster (Qx) is found to depend on its price (Px), price of its

closest competitors (Pz), interest rate charged by the bank (R), average income of

consumers (Y), and advertising expenditure on X (Ax).

Based on past data, the estimated demand equation is obtained as follows,

Qx = 183.94 - 3.07Px - 2.1 Pz - 5.2R + 0.02Y + 0.15AX

(53.5) (1.2) (1.8) (4.3) (0.0075) (0.064)

R² = 0.92

S.E of Regression = 8.75

F-Stat = 36.58

(Figures in parentheses show the standard errors of coefficient)

The current values for the independent variables are:

Px= RM55, Pz = RM60, R = 5.5%, Y = RM2.000, Ax = RM1,500

a) Interpret the coefficient of each independent variable. Do the signs conform to economic theory?

(3 marks)

b) Do you think the estimated equation can be accepted? Explain.

(4 marks)

c) Calculate the price and income elasticity of demand for Alpha oven toaster. Interpret on these elasticity coefficients.

(5 marks)

d) Derive the demand curve equation for Alpha oven toaster in the conventional way.

(2 marks)

e) If marginal cost for Alpha oven toaster is constant at RM40, calculate the profit maximizing price and output level.

(4 marks)

f) At the profit maximizing price, determine the range of quantity demanded for Alpha oven toaster that can be expected at the 95% confidence interval.