Case 3: Justifying An Increased Line of Credit
1. A monthly regression analysis is to be conducted using monthly data for each demand variable. Formulate your empirical model using the additive functional form.
2. Using economic theory what are the hypothesized signs of parameters in the demand model.
3. Interpret your estimated parameters
4. Estimate elasticities with respect to each independent variable.
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1: Based on the economic theory we know that the quantity demanded will depend upon own price, competitor's price, own advertising and time factor. Thus, the multiple regression model will be:
Chain's Sales = B0 + B1*Chain's Price + B2*Competitor's Price + B3*Department Store Price + B4*Chain's Advertising + B5*Time
Chain's Sales is the number of suits sold in the month
Chain's Price is the price charged by the chain in dollars
Competitor's Price is the price charged by the competitors in dollars
Department Store Price is the price charged by the Department Store in dollars
Chain's Advertising is the advertising expenditure incurred by the chain as percentage of revenues
Time is the time period (the number of month)
B0, B1, B2, B3, B4 and B5 are regression coefficients
Sign for B0: B0 is the constant term, which means that when the value for all variables is zero in the equation what will be our demand. The constant term can take both positive and negative signs but just think when the price of an item is zero; there will be many people who would be willing to take that product. Therefore, the sign of the B0 is hypothesized as positive.
Sign for B1: The own price has an inverse relation with quantity demanded. If the own price increases the demand for the product decreases and vice versa. Thus, the hypothesized sign for the B1 is negative.
Sign for B2: While the own price has an inverse relation with quantity demanded, the price of the competitors has a positive relationship. When the price of the competitor's increase, our products look cheaper in comparison to the competitor to the customers and hence the demand for our products increase while the demand for competitor's products decline. On the other hand, when the competitor's price falls, our products become costlier in comparison to competitor products leading to decline in demand for our products. Thus, the hypothesized sign for the B2 is positive.
Sign for B3: The department store is also a competitor to our products although the competition is not as direct as in case of other chains. Thus, the relationship between the price of the department store and quantity demanded for our products is positive. Thus, the hypothesized sign for the B3 is positive. ...
This posting provides a complete systematic approach for solving the case "Justifying an increased line of credit". The analysis is done by using SPSS and both SPSS data file and output file are attached. The work document explains in detail the analysis conducted and interprets the results of the analysis (1524 words). This could be used as a good example to learn how to solve similar management cases involving data analysis for decision-making.