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Corporation believes

Resolved Question:

1. The director of marketing at Vanguard Corporation believes that sales of the companys Bright Side launder detergent (S) are related to

Vanguards own advertising expenditure (A), as well as the combined advertising expenditures of its three different rival detergents (R). The

marketing director collects 36 weekly observations on S, A, and R to estimate the following multiple regression equation:

S = a + bA + cR

Where S, A, and R are measured in dollars per week. Vanguards marketing director is comfortable using parameter estimates that are

statistically significant at the 10 percent level or better.

a. What sign does the marketing director expect a, b, and c to have?

b. Interpret the coefficients a, b, and c.

The regression output from the computer is as follows:

DEPENDENT VARIABLE: S

R-SQUARE

F-RATIO

P-VALUE ON F

OBSERVATIONS: 36 0.2247

&nb sp; 4.781

0.0150

&nbs p;

PARAMETER

STANDARD

VARIABLE

ESTIMATE

ERROR

T-RATIO

P-VALUE

INTERCEPT 175086.0

63821.0

2.74

0.0098

A

0.8550 &nb sp;

0.3250

2.63

0.0128

R

-0.284

&n bsp;

0.164

-.1.73

0.0927

c. Does Vanguards advertising expenditure have a statistically significant effect on the sales of Bright Side detergent? Explain, using the

appropriate p-value.

d. Does advertising by its three largest rivals affect sales of Bright Side detergent in a statistically significant way? Explain, using the

appropriate p-value.

e. What fraction of the total variation in sales of Bright side remains unexplained? What can the marketing director do to increase the

explanatory power of the sales equation? What other explanatory variables might be added to this equation?

f. What is the expected level of sales each week when Vanguard spends $40,000 per week and the combined advertising expenditures for

the three rivals are $100,000 per week?

Category: Homework

a.

a, b should be greater than 0 and c be less than 0.

b.

a means the sales will be amount a even the company and its competitors do not spend any money on advertising.

b means every one unit of advertising expenditure of vanguard spent, the sales will increase by b

c means every one unit of advertising expenditure of vanguard's competitor spent, the sales will decrease by c.

c.

Yes, because p-value=0.0128, is less than 10% siginificant level.

d.

Yes, because p-value=0.0927, is less than 10% siginificant level.

e.

unexplained variation=1-0.2247=0.7753

add more variable will increase the explanatory power of the sales equation

explanatory variables might be price of vanguard ans price of its competitors.

f.

the equation is

S=175086.0+0.8550A-0.284R

S=175086.0+0.8550*40000-0.284*100000=180886

them with yor help and direction, would you mind looking at the

finished product for correctness. I still got lost on some of it I think. I

could send them to you.

EY

Post them. We do not engage in Email with students for security

sake.

Ok, understand that perhaps I can post?

Ok, I understand...Economyst, you helped me get in the right

direction, can you see if I am on the right path?

sales of the companys Bright Side

Laundry detergent (S) are related to Vanguards own advertising

expenditure (A), as well as the combined

advertising expenditures of its three biggest rival detergents (R). The

marketing director collects 36 weekly observations on S, A, and R to

estimate thefollowing multiple regression equation:

S = a + bA + cR

Where S, A, R are measured in dollars per week. Vanguards

marketing director is comfortable

using parameter estimates that are statistically significant at the 10

percent level or better.

a)What sign does the marketing director expecta, b, and c to have?

ANSWER:

The director would expect his own advertising to have a positive effect

and the competitors advertising to

have a negative effect. He should expect some level of brand loyalty,

but his advertising should have a positive effect.

b)Interpret the coefficients a, b, and c?

ANSWER:

S = a + bA + cR

Here a will be the intercept parameter and b, along

with c, will be the slope parameter. Vanguards own advertising would

be a positive effort and the competitors would be negative.

END

The regression output from the computer is as follows:

Dependent Variable: S

R-Square: 0.2247 F ratio: 4.781

P-Value on F: 0.0150

Observations: 36

Variable: Intercept

Parameter Estimate: 175086.0

T ratio: 2.74 P-Value: 0.0098

Variable: A

Parameter Estimate: 0.8550

Standard Error: 0.3250

T ratio: 2.63 P-Value: 0.0128

Variable: R

Parameter Estimate: - 0.284

Standard Error: 0.164

T ratio: - 1.73 P-Value: 0.0927

c)Does Vanguards advertising expenditure have a statistical

significant effect on the sales of Bright Side detergent?

ANSWER:

Yes, at the 5% level, there is statistical significance at the 5% level.

Explain, using appropriatep-value

ANSWER:

A 0.0128 p-value means the exact level of significance for a T-Ratio of

2.63 is 1 % and the level of confidence

is 99%. Stating b is statistically significant.

d)Does the advertising by its three largest rivals affect sales of Bright

Side detergent in a statistical

significant way?

ANSWER:

P-Value and T-Ratio show that the competitors advertising has a

negative effect.

Explain using the appropriate p-value

ANSWER:

The high P-value indicates that the negative T-ratio has a high

probability of competitors advertising effecting sales of Bright Side

negatively.

e)What fraction of the total variation in sales of Bright Side remains

unexplained?

ANSWER:

22%

What can the marketing director do to increase the explanatory power

of the sales equation?

ANSWER:

He could look at the prices charged by the competitor and Vanguard

and add this to the equation as well as log variables on advertising

expenses.

What other explanatory variables might be added to this equation?

ASNWER:

Other variables might include family size, loads of laundry done during

the summer vs. the winter.

f)What is the expected level of sales each week when Vanguard

spends $40,000 per week and the combined advertising expenditures

for the three rivals are $100,000 per week?

ASNWER:

S = a + b($40,000) + c($100,000)

S = 175086.0 + 0.85550($40,000)

+ - 0.284($100,000)

S = 175086.0 + $34,000 + - $28,400

S = $209,306 + (- $28,400)

S = $180,906

4)The manager of Collins Import Autos believes that the number of

cars sold in a day (Q) depends on two factor: (1) the number of hours

the dealership

is open (H) and (2) the number of salespersons working that day (S).

After collecting the data for two months (53 days), the manager

estimates the following log-linear model:

bc

Q = aH S

a)Explain how to transform this log-linear model into a linear form that

can be estimated using multiple regression analysis.

ANSWER:

Logarithms must be taken of the equation to transform the log-linear

model into a non-linearequation:

Q = aHbSc would be:

In Y = (In a) = b (In H) + c (In S)

We define the following:

Q = In Q

H = In H

S = In S

The linear equation is: Q = a + bH + cS

The computer output for the multiple regression analysis is shown

below:

Dependent Variable: LNQ

R-Square: 0.5452

F-Ratio:29.97

P-Value on F: 0.0001

Observations: 53

Variable: Intercept

Parameter Estimate: 0.9162

Standard Error: 0.2413

T-Ratio: 3.80 P-Value: 0.0004

Variable: LNH

Parameter Estimate: 0.3517

Standard Error: 0.1021

T-Ratio: 3.44 P-Value: 0.0012

Variable: LNS

Parameter Estimate: 0.2250

Standard Error: 0.0785

T-Ratio: 3.25 P-Value: 0.0021

b)How do you interpret coefficients b and c? If the dealership

increases the number of salespersons by 20 percent, what will

thepercentage increase in daily sales?

ANSWER:

The parameter estimates of b and c are elastic. A 20% Increase in

salespeople would result in a decrease in daily sales.

c)Test the overall model for statistical significance at the 5% level?

ASNWER:

1 P-Value = level of confidence with the F-Stat

53 Observations 3 Parameters = 50, the critical T-value is 2.0. The

T-Ratios are over this so the significance level is strong a 5%.

d)What percent of the total variation in daily auto sales is explained by

this equation?

ANSWER:

54%

What could you suggest to increase this

percentage?

ANSWER:

Perhaps pricing of the product could be used as a determinant of

sales.

e)Test the intercept for statistical significance at the 5% level of

significance.

ANSWER:

Values are significant at the 5% level.

If H and S both equal 0, are the sales expected to be 0? Explain why

or why not..

ANSWER:

If H and S are equal to 0 the explanatory variables which b is a

coefficient, is not relative to the dependant variable.

f)Test the estimated coefficient b for statistical significance. If the

Dealership decreases its hours of operation by 10%, what is the

expected

impact on daily sales?

ANSWER:

The coefficient b is statistically significant at the 5% level. If hours of

operation are decreased the number of sales will decrease.

Thanks for your help!

EY

Ok, EY, for the most part, you are on the right track. That said, i think it

analyses is trying to do and what the statistics mean.

For a parameter estimate, the T ratio is simply the parameter estimate

divided by the standard error. A negative T ratio simply means the

parameter estimate is negative. The test is: is the parameter estimate

significantly different from zero. You could take the T ratio and find a

probability in a cumulative normal distribution table. However, most

stat packages do it for you; hence the P-Value. The P-Value gives the

probability that the "true" parameter is zero (or worse, the opposite

sign). The F statistic tests whether the explanatory power of the

overall model is significantly different from zero.

"The high P-value indicates that the negative T-ratio has a high

probability of competitors advertising effecting sales of Bright Side

negatively."

No No No. The High P Value of .09 means there is a high (9%)

probability the parameter estimate is zero or worse. It is not

significant. Further, the sign has nothing to do with the significance.

The R-squared gives a measure of the total variation in y that is

explained by the specified model. An R^2 of .22 means the 22% of the

variation is explained, which means that 78% is unexplained. Check

your answer e)

To increase the explanatory power, you suggested using logged

variables. This may be true, but why? Taking logs of variables is one

way of converting a non-linear relationship into a linear relationship.

As I posted earlier, I suggested lagged variables. That is, advertising

this week affects not only sales this week but sales next week and the

week after.

Now equation 2) In my earlier post, I said that in a log model,

parameter estimates were elasticities (not elastic). (See your basic

economics text if you are confused about what an elasticity is and

represents). So, the estimated elasticity of car sales (Q) to sales

people (S) is .225. So if S goes up by 20%, we would expect Q to

INCREASE by 20%*.225 = 4.5%.

Answer c) For the overall significance of a model, look at the P-value

on the F-statistic. Since the P value is so very low, we can say the

model is significant; it does explain at least some of the variation in the

y variable.

Answer e). Your original specification is Q=aHS. So, if H and S are

zero, the Q must be zero.

Answer f). Again, the parameter estimate is and elasticity. If H goes

down by 10%, then Q decreases by 10%*.3517 = 3.517%.

Well, thanks, I think you pointed out I am still confused, this stuff is

hard to understand. I meant log-linear variables, I thought that was

where you were pointing me because I saw these in the book.

I will go back and look at these, it appears I only understood about half

Now on to theory of Consumer behavior with marginal utility, market

demand, and income.

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