# Mathematical Economics Problems - Franklin Electric

Franklin Electric is a holding company interested in the possible acquisition of "electricity retailers" that are expected to be spun off as the industry is deregulated. As the project point person you have been asked to do some preliminary demand analysis in order to better understand this particular market. Franklin hired a consultant to collect average values from each of the fifty US states and to generate a cross-sectional demand model (see regression output table below).

The final estimated demand function was provided by the consultant as:

Qd = 36,315 - 9,937 * [Price] - .09 * [Income] + .02 * [Customers] + 2,198 * [Price of Natural Gas]

Select the best response among those possible for the next 6 questions:

15.1. Ignoring the intercept, which of the variables appears to be the least significantly different from zero?

a .Price

b. Income

c. Customers

d. Price of Natural Gas

15.2. Which of the following is most likely the 95% confidence interval for any estimate of sales?

a. 36,314

b. 11,855

c. 23,710 (i.e. 2 * 11,855)

d. 24,804 (i.e. 2 * 12,402)

15.3. Estimate the (own) price elasticity (of demand). Assume the following: own price is $3, income is $60,000, the market has 2,000,000 potential customers and the price of natural gas is $4. (The following numbers are absolute values.)

a. .48

b. .60

c. .0001

d. 9936

15.4 Assuming price is $3, income is $60,000, the market has 2,000,000 potential customers, and the price of natural gas is $4, estimate the cross-price elasticity (of demand).

a. -.35

b. .18

c. .80

d. 2197

15.5 In general which of the following statements best describes the retail market for electricity?

a. The electricity market is highly price sensitive.

b. The electricity market is not highly price sensitive

c. Electricity is an inferior good.

d. The information is insufficient to determine the relationship between the two.

15.6 In general which of the following statements best describes the retail market for electricity?

a. Natural Gas is a strong substitute for electricity.

b. Natural Gas is a weak substitute for electricity

c. Natural Gas and Electricity are complements

d. The information is insufficient to determine the relationship between the two.

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.952665406

R Square 0.907571375

Adjusted R Square 0.899355498

Standard Error 11855.33782

Observations 50

ANOVA

df SS MS F Significance F

Regression 4 62103300373 15525825093 110.4655404 1.15205E-22

Residual 45 6324706572 140549034.9

Total 49 68428006945

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%

Intercept 36314.73042 12402.07389 2.928117567 0.005334172 11335.67174 61293.7891 11335.67174 61293.7891

Price of Electricity -9936.77542 2355.877759 -4.217865456 0.000117633 -14681.75673 -5191.794111 -14681.75673 -5191.794111

Per Capita Income -0.088893562 0.192439551 -0.461929797 0.646357184 -0.476486708 0.298699583 -0.476486708 0.298699583

Customers 0.021008131 0.001015193 20.69372158 1.26417E-24 0.018963427 0.023052836 0.018963427 0.023052836

Price of Natural Gas 2197.782203 2001.131186 1.098269928 0.277928379 -1832.702841 6228.267248 -1832.702841 6228.267248

Regression Output table for Franklin Electric

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#### Solution Summary

In this solution six multiple choice questions related mathematical economics is solved.