Executive Summary

Mrs. Smyth’s was founded in Chicago and its main product is processing and producing

frozen fruit pies in the market for several years and the company established a research and

development department to cope up in the dynamic changes in the market and enabling the

company to adapt and meet the demand of the product in the market. The research and

development department of Mrs. Smyth’s, Inc. are task to collect a quarterly data in its sales per

quantity, retail price charged for the pies, local advertising and promotional expenditures and price

charged by competitors for the same product to use in demand estimation of the product of Mrs.

Smyth’s, Inc.

The objective of the study are; to describe the economic meaning and statistical

significance of each individual; interpret the meaning of coefficient of determination (𝑅 2 ) for

demand estimation; project the sales per unit for year 2008-1 in the market in Washington,

Arlington and Alexandria; and lastly, the approximate standard of error for confidence intervals

for 2008-1 demand estimation. The main problem of the study is to have an accurate demand

estimation of the product to meet the appropriate demand of frozen fruit pies in three different

markets. The method used in the study is simple regression analysis to estimate the demand of

frozen fruit pies.

The result of the study showed that the individual coefficients variable has no clear

economic meaning and each $1 increase in price will decrease the sales by 122,607 frozen fruit

pies. Thus, it only means that it is following the rule of Law of Demand that states that the price

of the product has indirect relationship with quantity demanded. The individual variable of Mrs.
Smyth’s can only be explained by 87.1% by regression model. Lastly, to meet the projected sales

in 2008-1 the company needed to produce approximately 200,430 pies.

Regression/Demand Equation:Qᵢᵼ = 529,774 – 122,607+ 5.838 + 29,867 + 2.043 + 0.030 + 2,815

A. Describe the economic meaning and statistical significance of each individual independent

variable included in the Mrs. Smyth’s frozen fruit pie demand equation

The individual coefficients or variable for Mrs. Smyth’s pie demand regression can be

interpreted as follows: the intercept term bₒ = 529,774 has no clear economic meaning as it lies far

outside the range of observed data. Remember, caution must always be exercised when interpreting

points outside the range of observed data and this intercept, like most, lies far from typical values.

This intercept obviously cannot be interpreted as the demand for Mrs. Smyth’s frozen fruit pies

when all the independent variables take on zero values. The coefficient for each independent

variable indicates the marginal relation between that variable and sales of pies, ceteris paribus, in

the demand function. To simply put, slope coefficients provide estimates of the change in sales

that might be expected following a 1-unit increase other variables. In this case, sales are measured

in units, and each independent variable is measured in dollars.

Therefore, in each $1 increase in price causes Mrs. Smyth’s pies quarterly sales to decline

by 122,607 pies. Similarly, the 5.838 coefficient for A, the advertising variable, indicates that for

each $1 increase in advertising during the quarter, roughly 5.838 additional pies are sold. Demand

for Mrs. Smyth’s frozen pies rises by 29,867 pies with every $1 hike in competitor prices, and a

$1 increase in average disposable income per household leads to about 2.043-unit increase in

quarterly fruit pie demand. Likewise, a one person increase in the population of a given market

area leads to a small 0.030-unit increase in quarterly demand in pie. Finally, the coefficient for the

trend factor or time variable indicates that pie demand is growing in a typical market by around

2,815 units per quarter. Mrs. Smyth’s is enjoying secular growth in fruit pie demand.
 In each instance, the effect of independent X variables appears quite consistent over the

entire case. The t statistics for price and advertising exceed the value of 2, meaning that there can

be 95 percent confidence that price and advertising have an effect on sales. According to Hirschey,

M. (2012), a calculated t statistics greater than 3 typically permits rejection of the hypothesis that

there is no relation between the dependent Y variable and a given X variable at the α=0.01

significance level (with 99 percent level of confidence).

In Mrs. Smyth’s frozen fruit pie demand equation, the coefficient estimates for price (P),

advertising (A), competitor price (PX), and population (Pop) are all more than twice as large as

their respective standard error of coefficient. Therefore, it is possible to reject the hypothesis that

each of these independent variables is unrelated to pie demand with 95 percent confidence. These

coefficient estimates suggest an especially strong relation between pie demand and the P, A, and

Pop variables. Each of these coefficient estimates is over three times as large as its underlying

standard error and therefore is statistically significant at the 99 percent confidence level. Once the

effects of these independent variables have been constrained, there is no additional independent

influence noted for income (Y) or the time trend variable (T).

B. Interpret the coefficient of determination (R2) for the Mrs. Smyth’s frozen fruit pie demand

equation.

The coefficient of determination is R2=87.1%; it indicates that 87.1 percent of the variation

in Mrs. Smyth’s pie demand is explained by the regression model. An 87.1% of change in sales

units can be explained by the change in price, advertising, competitor’s price, income, population,

and the time variable. Only 12.9 percent is left unexplained. This is a very satisfactory level of

explanation for the model as a whole. Moreover, the adjusted or corrected coefficient of
determination is Ṝ2=85.2%, this reflects relatively modest downward adjustment to R2=87.1%; it

suggests that the high level of explanatory power achieved by the regression model cannot be

attributed to an overly small sample size. This suggests that the regression model explains a

significant share of demand variation – a suggestion that is supported by the F statistics. The F

statistic is used to indicate whether a significant share of variation in the dependent variable has

been explained by the regression model. Now, F statistic=45.16 and it is far greater than 5, meaning

that the hypothesis of no relation between sales and this group of independent X variables can be

rejected with 99 percent confidence. Also, the hypothesis actually tested is that the dependent Y

variable is statistically unrelated to all the independent X variables included in the model.

If this hypothesis cannot be rejected, variation explained by the regression is small. The

critical value for F is denoted as F f r f 2, where f1 , the degrees of freedom for the numerator, equals

k -1, and f2 the degrees of freedom for the denominator, equals n-k. In this case, the F statistic for

this problem involves f1 = k -1 = 7-1 = 6, and f2 = n – k, n-k = 48 – 7 = 35 degrees of freedom. This

means that there is less than 1% chance of observing such a high F statistic when there is no link

between the dependent Y variable and the entire group of X variables.

C. Use the regression model and 2007 – 4 data to estimate 2008 – 1 unit sales in the

Washingon-Arlington-Alexandria market.

To project the next quarter’s sales of frozen fruit pies of Mrs. Smyth in the Washington-

Arlington-Alexandria, DC-VA-MD-WV, market the company must simply enter expected values

for each independent variable in the estimated demand equation. Mrs. Smyth’s expects an average

price for its pies of $7.95, advertising expenditures of $30,487. The prices of competing pies are

expected to be $5.69; disposable income per capita is $53,235; population in the market area is
5,445,382 persons; and the quarter for which demand is being forecast is the ninth quarter in the

model. Inserting the appropriate unit values into the demand equation results in an estimated

demand of:

Q = 529,774 – 122,607 (7.95) + 5.838 (30,487) + 29,867 (5.69) + 2.043 (53,235)

+ 0.030 (5,445,382) + 2,815 (9)

Q = 529,774 – 974,725.65+177,983.11+169, 943.23+108,759.11+163,361.46+25,335

Q = 200,430.26 pies

D. To illustrate use of the standard error of the estimate statistic, derive the 95 percent and

99 percent confidence intervals for 2008-1 unit sales in the Washington-Arlington-

Alexandria market.

Although 200,430 is the best estimate of pie demand for the Washington- Arlington-

Alexandria market during the 2008-1 period, it is highly unlikely that precisely this number of pies

will be sold. Either more or less may be sold, depending on the effects of other factors not explicitly

accounted for in our pie demand estimation model. The standard error of the estimate is a very

useful statistic because it allows us to construct a range or confidence interval within which actual

sales are likely to fall. For example, sales can be projected to fall within a range of ± 2 standard

errors of the 200,430 expected sales level with a confidence level of 95 percent. There is only 5

percent chance that actual sales in the Washington-Arlington-Alexandria market during the

coming period will fall outside this range. Similarly, there is a 99 percent chance that actual sales

will fall in the range of 200,430 ± 3(67,584), and only a 1 percent chance that actual sales will fall

outside the range.

 MANAGERIAL ECONOMICS

Cor Jesu College,Inc.

Master in Business Administration

Major in Business Management

In Partial Fulfillment of the Requirements in

Managerial Economics

Submitted by:

Fatima M. Chin

John Paul Cameros

Francis Decena

Submitted to:

Br. Ernesto A. Quidet Jr.