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consumption theory

Would there be any differences in the set of variables used in a regression model of the demand for consumer durables (e.g., automobiles, appliances, furniture) and a regression model of the demand for "fast-moving consumer goods" (e.g., food, beverages, personal care products)?

Think about the factors that influence your decision when you go to Walmart to buy shampoo versus the factors that influence your decision when you go to the car dealership to purchase a car. For example, does your future earning power come into play when you are deciding between two different types of shaving creams? How about when you are deciding between a Lexus or a Toyota?

Again, use economic theory to back up your answer. What is the point of a regression and why do the dependent variables matter so much when developing the regression model.]

Solution Preview

You would likely want to include some different variables in a regression model of demand for consumer durables and non-durables. Recall the types of variables that are typically included in a demand equation (the price of the good, income, tastes, prices of related goods, and future expectations about all those things). While these things certainly play a role in demand for most all goods, when we talk about durable vs. non-durable goods some variables will affect one demand function more than another.

In the question above you are asked about non-durables such as food, beverages, and personal care product. What are some characteristics of these types of goods. Probably most important is that the prices per unit tends to be lower relative to most durable goods. This means that a lower % of income is spent on them. So, while people may generate a range of incomes and those incomes may fluctuate with business cycles, even those with low levels of income will ...

Solution Summary

This post illustrates consumption theory.

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