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# Regression analysis applications

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Please see attached document with discussion questions and integrating problem.

Valerie Smith
Managerial Economics
18 January 2009
CHPT 3 AND 4

Chapter 3 question #11 on page 127
11. Suppose that the cross-price elasticity of demand between McIntosch and Golden Delicious apples is 0.8, between apples and apple juice is 0.5, between apples and cheese is 0.4, and between apples and beer is 0.1. What can you say about the relationship between each set of commodities?

Chapter 4 question #11 on page 177
11. Does regression analysis imply causality? Explain

Integrating Problem # 15 page 129
The research department of the Corn Flakes Corporation (CFC) estimated the following regression for the demand of the cornflakes it sells:
Qx=1.0-2.0Px+1.5I+0.8Py-3.0Pm+1.0A
Where Qx= sales of CFC cornflakes, in millions of 10-ounce boxes per year
Px= the price of CFC cornflakes, in dollars per 10-ounce box
I= personal disposable income, in trillions of dollars per year
Py= price of competitive brand of cornflakes, in dollars per 10-ounce box
Pm- price of milk, in dollars per quart
A= advertising expenditures of CFC cornflakes, in hundreds of thousands of dollars per year
This year, Px =\$2, I=\$4, Py=\$2.50, Pm = \$1, and A = \$2
a) Calculate the sales of CFC cornflakes this year.

b) Calculate the elasticity of sales with respect to each variable in the demand function.

c) Estimate the level of sales next year if CFC reduces Px by 10 percent, increases advertising by 20 percent, I rises by 5 percent, Py is reduced by 10 percent, and Pm remains unchanged.

d) By how much should CFC change its advertising if it wants its sales to be 30 percent higher than this year?

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#### Solution Preview

11. Suppose that the cross-price elasticity of demand between McIntosch and Golden Delicious apples is 0.8, between apples and apple juice is 0.5, between apples and cheese is 0.4, and between apples and beer is 0.1. What can you say about the relationship between each set of commodities?

The cross price elasticity of demand tells us how demand for a good is affected by the price of another good. The value ranges from -1 to 1, with 1 indicating that for each one percent increase in price of the other good, there is also a one percentage increase or decrease in demand for the product. -1 indicates that demand for the good declines proportionately with the price of the other good. A negative cross price elasticity of demand therefore indicates that the goods are complements, while a positive value indicates that they are substitutes. A value of zero means that there is not relationship between the demand for the good and the price of the other good.

So, a value of .8 indicates that the two types of apples are substitutes; an increase in the price of one type strongly increases demand for the other type. The .5 value indicates that apples and apple juice are also substitutes, but not as much so. Apples and cheese are even less likely to be ...

#### Solution Summary

Use of regression analysis for business management

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