value for each independent variable's coefficient estimate
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The MacWend Drive-In has determined that demand for hamburgers is given by the following equation:
Q = 205.2 + 23.0A - 200.0PM + 100.0PC + 0.5I
(1.85) (2.64) (-5.61) (2.02) (4.25)
where Q is the number of hamburgers sold per month (in 1,000s), A is the advertising expenditures during the previous month (in $1,000), PM is the price of MacWend burgers (dollars), PC is the price of hamburgers of the company's major competitor (dollars), and I is income per capita in the surrounding community (in $1,000). The t-statistics for each coefficient is shown in parentheses below each coefficient.
1. How would you interpret the value for each independent variable's coefficient estimate?
2. Are the signs of the individual coefficients consistent with predictions from economic theory? Explain.
3. If A = $5,000, PM = $1, PC = $1.20, and I = $20,000, how many hamburgers will be demanded?
4. What is the advertising elasticity at A = $5,000?
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Solution Summary
Determine value for each independent variable's coefficient estimate.
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Question 1
First of all, since all the coefficients associated wit hthe independent variables have t-statistics that are either greater than 2 or smaller than -2, we have evidence that all of the independent variables in the equation (advertising expenditure, price of McWend burgers, price of competitor and income) do have a significant effect on the demand for McWend burgers.
Now, the coefficients are interpreted in the following way. We have that the coefficient associated with advertising expenditure (A) is +23.0. Since both Q and A are measured in 1000's, this coefficent tells us that each extra $1,000 spent on advertsing increases the demand of burgers by 23,000. The following coeffcients are interpreted in a similar fashion:
- Price of McWend burgers (PM): The coefficient is -200.0. This means that if McWend increases the price of its ...
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