You are on page 1of 11

# 1.

## The director of marketing at Vanguard

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?

## Submitted: 7 years ago.

Category: Homework

## Expert: muvee replied 7 years ago.

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

## have put together my set of questions that I posted and answered

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?

## 1)The director of marketing at Vanguard Corporation believes the

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

## Standard Error: 63821.0

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?
Yes, at the 5% level, there is statistical significance at the 5% level.
Explain, using appropriatep-value
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?

P-Value and T-Ratio show that the competitors advertising has a
negative effect.
Explain using the appropriate p-value
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?
22%
What can the marketing director do to increase the explanatory power
of the sales equation?
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.
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?
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?

54%
What could you suggest to increase this
percentage?
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.
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..
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?
The coefficient b is statistically significant at the 5% level. If hours of
operation are decreased the number of sales will decrease.
EY
Ok, EY, for the most part, you are on the right track. That said, i think it

## would be helpful if you better understood what linear regression

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.

## Under d) in the first problem, you answered

"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
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

## and got the other reveresed, like p-values.

Now on to theory of Consumer behavior with marginal utility, market
demand, and income.