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.