QUIZ 3 - DEMAND ESTIMATION

NAME: ________________________________________________

MATRIC NUMBER: ______________________________________

ANSWER ALL QUESTIONS

QUESTION 1

Syarikat Yuki conducted a market study on tis fish cake for a period of 35 weeks and the

following is the estimated demand function for the fish cake:

Q = 5,100 - 300P + 150X + 0.03A + 0.012Y

(6,000) (132) (78) (0.012) (0.003)

R 2 = 0.875

Standard error of estimate = 60

Q = quantity demanded for Yuki's fish cake.

P = per packet price of Yuki fish cake = RM8 per packet

X = price of an unidentified product = RM6

A = advertising expenditure of Syarikat Yuki = RM30,000

Y = average household income = RM5,000

Figures in parentheses indicate standard errors of coefficients.

a) Derive the conventional demand curve equation and calculate the estimated quantity

demanded for Yuki's fish cake.

What is the range of sales volume that can be expected at the 95% confidence

interval? (Given that t 30. =0.05 = 2.042)

(4 marks)

b) How many percent of the variation in Q cannot be explained by the independent

variables, P, X, A and Y? give one reason to explain why.

(2 marks)

c) Calculate the t-value for each of the independent variables. Comment on the results

given that the critical t-value at 95% confidence interval is 2.042.

(4 marks)

d) Based on the existing values for all the independent variables, and given the

marginal cost of producing one packet of Yuki's fish cake is RM5, what should be the

profit-maximizing price for each packet of Yuki's fish cake?

(3 marks)

e) What impact would a 5% increase in income have on the demand for Yuki's fish

cake? Compute your answer in terms of percentage and in terms of number of

packets of fish cake.

(3 marks)

f) The sales manager informed the general manager that the current price of RM8 per

packet of Yuki's fish cake is too low if the firm wants to maximize total revenue.

i) Do you agree with the sales manager?

Support your answer with calculations.

(2 marks)

ii) If the sales manager is correct, how much is the difference between the

existing total revenue and the maximum total revenue?

(2 marks)

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)

R 2 = 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.

(2 marks)

END OF QUESTION PAPER