Chapter 4 Techniques For Understanding Consumer Demand and Behavior

Economics for Managers, 3e (Farnham)
Chapter 4 Techniques for Understanding Consumer Demand and Behavior
1) Which of the following approaches to understanding and predicting consumer behavior

depends primarily on the knowledge and experience of a firm's employees and its suppliers?
A) Direct consumer surveys.
B) Expert opinion.
C) Analysis of historical data.
D) Test marketing and price experiments.
Answer: B
Diff: 1
Topic: Marketing approaches
2) In which of the following situations would reliance on expert opinion as a basis for a
managerial decision be most preferred?
A) When the product can be packaged with a variety of price and quality combinations.
B) When the business in question serves as a supplier of inputs to other businesses, especially in
multi-product situations where other strategies may be prohibitively expensive.
C) When the level of economic activity can have a significant effect on the demand for the firm's
output.
D) When the product being marketed is relatively new.
Answer: B
Diff: 2
3) All of the following are limitations of direct consumer surveys except:

A) the possibility that consumers' responses may not reflect their actual behavior in the market
place.
B) the possibility of response biases because survey respondents may not want to reveal their
true preferences.
C) the likelihood that respondents will deliberately and systematically mislead interviewers.
D) the possibility that the type of questions asked may unintentionally bias the respondent's
answers.
Answer: C
Diff: 2
4) The approach to analyzing consumer behavior that asks consumers to rank and choose among
different product attributes to reveal their relative valuation of different characteristics is called:
A) a direct consumer survey.
B) contingent valuation.
C) the hedonic estimation technique.
D) conjoint analysis.
Answer: D
Diff: 1
1
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5) Which of the following approaches to understanding and predicting consumer behavior does
not actually solicit any information from any potential customers?
A) Test marketing.
B) Conjoint analysis.
D) Expert opinion.
Answer: C
Diff: 1
6) Which of the following approaches to understanding and predicting consumer behavior

provides the most insight into how consumers can be expected to respond in an actual market
setting?
A) Test marketing.
B) Conjoint analysis.
D) Expert opinion.
Answer: A
Diff: 1
7) Which of the following statements is correct?

A) The use of Census data is especially useful and cost-effective in targeted marketing.
B) Census data are considered more reliable than data collected via direct consumer surveys
because people are more likely to provide accurate responses to government census takers.
C) While the use of census data in targeting marketing can provide relatively accurate
information, experience has shown that it has the disadvantage of increasing marketing costs by
a substantial amount.
D) While census data are considerably less expensive than data obtained via direct consumer
surveys, they are also considerably less reliable.
Answer: A
Diff: 2
Topic: Census data
8) An approach to analyzing consumer behavior in which consumer reaction to different prices is

analyzed in a laboratory situation or a test market is called:
A) price experiments.
B) non-price experiments.
C) focus groups.
D) none of the above.
Answer: A
Diff: 1
Topic: Price experiments
2
9) Data collected on a sample of individuals with different characteristics at a specific point in
time are called:
A) cross-section data.
B) time series data.
C) panel data.
Answer: A
Diff: 1
Topic: Cross-section data
10) Data collected on the same observation unit at a number of points in time are called:
A) cross-section data.
B) time series data.
C) panel data.
Answer: B
Diff: 1
Topic: Time series data
11) Cross-sectional data observed at several points in time is known as:

A) time series data.
B) panel data.
C) experimental data.
Answer: B
Diff: 1
12) Regressional analysis that analyzes the relationship between one dependent variable and one
independent variable is called:
A) simple regression analysis.
B) correlation analysis
C) multiple regression analysis.
D) cluster analysis.
Answer: A
Diff: 1
Topic: Regression analysis
13) Regression analysis that analyzes the relationship between one dependent variable and
several independent variables is called:
A) simple regression analysis.
B) correlation analysis.
C) multiple regression analysis.
D) cluster analysis.
Answer: C
Diff: 1
3
14) The least squares regression is based on:
A) maximizing the absolute sum of squares errors.
B) minimizing the absolute sum of squares errors.
C) maximizing the sum of squared errors.
D) minimizing the sum of squared errors.
Answer: D
Diff: 1
15) You have the following demand equation for a pack of cigarettes: Q = 200 - 0.30P with the
average quantity 3 packs and average price $3.00 per pack. What is the price elasticity?
A) 0.30
B) -0.30
C) 1.0
D) -1.0
Answer: B
Diff: 2
Topic: Price elasticity
16) A measure of how much the coefficient would vary in regressions based on different samples
is called:
A) standard error of the estimated coefficient.
B) F-statistic.
C) partial F-statistic.
D) t-statistic.
Answer: A
Diff: 1
17) The ratio of the regression coefficient to its standard error is called:
A) t-statistic.
B) F-statistic.
C) partial F-statistic.
D) coefficient of determination.
Answer: A
Diff: 1
18) The test statistic used to test the hypothesis of whether a regression coefficient is
significantly different from zero, holding all other independent variables constant, is called a(n):
A) F-test.
B) autocorrelation test.
C) multicollinearity test.
D) t-test.
Answer: D
Diff: 1
4
19) The coefficient of determination is defined as the:
A) ratio of the total sum of squared errors to the sum of squared errors.
B) ratio of the regression sum of squares to the sum of the squared errors.
C) ratio of the sum of squared errors to the total sum of squared errors.
Answer: C
Diff: 2
20) The number of observations minus the number of estimated coefficients in a regression
equation is called:
A) degrees of freedom.
B) variance.
C) standard error fo the regression.
Answer: A
Diff: 1
21) The F-statistic is an alternative measure of goodness-of-fit of an estimated regression

equation and defined as the:
A) variation not explained by the regression equation relative to the variation explained.
B) variation explained by the regression equation to the variation not explained.
C) variation explained.
D) variation not explained.
Answer: B
Diff: 2
22) The range of values in which we can be confident that the true regression coefficient lies
within a given degree of probability is called a:
A) prediction interval.
B) confidence interval.
C) logistic regression.
Answer: B
Diff: 1
5
23) The total sum of squares is 400 and the sum of squares errors is 100, what is the coefficient
of determination?
A) 25
B) 0.75
C) 1.00
D) 0
Answer: B
Diff: 2
24) An estimated regression coefficient is 10 with a standard error of 5. The null hypothesis is
that the partial regression coefficient equals zero. What is the value of the t-statistic for testing
the null hypothesis of the regression coefficient?
A) 1
B) 2
C) 0.5
D) 5
Answer: B
Diff: 2
25) An estimated regression coefficient is 10 with a standard error of 5. The null hypothesis is
that the partial regression coefficient equals one. What is the value of the t-statistic for testing the
null hypothesis of the regression coefficient?
A) 1
B) 2
C) 1.8
D) 0.5
Answer: C
Diff: 2
26) The coefficient of determination is .90, the number of observations is 30, and a multiple
regression model using 2 independent variables is estimated. What is the value of the adjusted
coefficient of determination?
A) .8926
B) .9000
C) .7500
D) .8000
Answer: A
Diff: 3
6
27) The coefficient of determination will range between what values?
A) 0 and 1
B) -1 and +1
C) -3 and +3
D) none of the above
Answer: A
Diff: 1
28) The estimated regression equation is Y = 10 + 2.5X, if X =0 than the predicted value of Y is
equal to:
A) 12.5
B) 10
C) 2.5
D) 7.5
Answer: B
Diff: 1
29) Given the demand function in log-linear form: Q = 120 - 1.5P + 12ADV where Q = quantity,
P = price, and ADV = advertising expenditures, what is the price elasticity?
A) 1.5, inelastic
B) -1.5, elastic
C) 120, elastic
D) 12, elastic
Answer: B
Diff: 2
7
Scenario 1: The demand model relating the quantity of good XYZ sold (QXYZ) to the price of
good (PXYZ) is reported below:
QXYZ = 4.46 + .304 PXYZ
Coefficient Standard Error

4.46 3.04
.304 .3243
Analysis of Variance:
Source DF Sum of Squares
Regression 141.9
Residual 3718.9
Total 24
30) Refer to Scenario 1. What is the t-statistic for the slope coefficient?
A) 3.04
B) 0.94
C) 0.30
D) 4.46
Answer: B
Diff: 2
31) Refer to Scenario 1. What is the coefficient of determination?

A) 1.000
B) 0.000
C) 0.037
D) 0.324
Answer: C
Diff: 2
32) Refer to Scenario 1. Is the slope coefficient statistically different from zero?
A) No.
B) Yes.
C) Inconclusive.
D) None of the above.
Answer: A
Diff: 2
8
33) Refer to Scenario 1. What is the total sum of squares?
A) 3860.8
B) 3718.9
C) 141.9
D) None of the above.
Answer: A
Diff: 2
34) In a multiple regression problem involving two independent variables, if b1 is computed to

be +2.0, it means that:
A) the relationship between X1 and Y is significant.
B) the estimated value of Y increases by an average of 2 units for each increase of 1 unit of X1,
holding X2 constant.
C) the estimated value of Y increases by an average of 2 units for each increase of 1 unit of X1,
without regard to X2.
D) the estimated average value of Y is 2 when X1 equals zero.
Answer: B
Diff: 2
35) A constant-elasticity demand function can be obtained by:

A) taking the logarithm of the dependent variable only.
B) taking the logarithm of the independent variable(s) only.
C) taking the logarithm of the dependent and independent variable(s).
D) taking the reciprocal of the dependent variable(s).
Answer: C
Diff: 2
Topic: Model transformations
36) Reliance on expert opinion to predict consumer behavior has the advantage of being a
relatively low cost approach to gathering information. In many situations, however, it is subject
to several sources of bias that can undermine its reliability.
Answer: TRUE
Diff: 2
37) Conjoint analysis employs an approach to consumer behavior that is similar to the economic
indifference curve model.
Answer: TRUE
Diff: 1
9
38) When using expert opinion, consumer surveys, test marketing, and price experiments to
analyze consumer behavior, managers must consider whether the participating groups are
representative of the larger population.
Answer: TRUE
Diff: 1
analyze consumer behavior, managers must consider whether the answers given in these formats
represent actual market behavior.
Answer: TRUE
Diff: 1
analyze consumer behavior, managers must consider how to isolate the effect of different
variables that influence demand.
Answer: TRUE
Diff: 1
41) Cross-section data observed at several points in time are called inverted data.
Answer: FALSE
Diff: 1
42) Least squares regression minimizes the sum of the absolute errors.
Answer: FALSE
Diff: 1
Topic: Least squares regression
43) The intercept of the equation: Y = .09 + 1.5X is 1.5.

Answer: FALSE
Diff: 1
44) The total sum of squares equals the sum of squares of the variation explained by the
regression and the sum of squares of the errors.
Answer: TRUE
Diff: 1
45) The coefficient of determination is the proportion of the variation that is not explained by the
regression model.
Answer: FALSE
Diff: 2
10
46) The overall predictive power of the estimated regression equation is measured by the F-
statistic.
Answer: TRUE
Diff: 1
47) The t-test is used to test hypotheses concerning the individual regression coefficients.
Answer: TRUE
Diff: 1
48) Adjusted R2 gives the actual percentage of the variation in the dependent variable explained
by the regression model.
Answer: FALSE
Diff: 3
49) Adding an independent variable to a regression model will always reduce the coefficient of
determination.
Answer: FALSE
Diff: 2
50) The degrees of freedom in a regression equation is the number of observations minus the
number of estimated coefficients.
Answer: TRUE
Diff: 1
51) The coefficient of determination represents the ratio of the regression sum of squares to the
total sum of squares.
Answer: TRUE
Diff: 1
52) Regression analysis is used for prediction, while correlation analysis is used to measure the
strength of the association between two variables.
Answer: TRUE
Diff: 1
53) The statistical significance of the slope coefficient can only be tested using the F test.
Answer: FALSE
Diff: 2
11
54) Log-linear demand function is also called a constant-elasticity demand function.
Answer: TRUE
Diff: 1
Topic: Model transformations
55) Price elasticities tend to be higher, the greater the number of substitutes.
Answer: TRUE
Diff: 1
56) Briefly describe the three key points managers must consider when using expert opinion,
consumer surveys, test marketing, and price experiments in analyzing consumer behavior.
Answer: Managers must consider whether the participating groups are truly representative of the
larger population, whether the answers given in these formats represent actual market behavior,
and how to isolate the effect of different variables that influence demand.
Diff: 1
57) What are the effects of two independent variables that are highly correlated? What can be
done to remedy the problem?
Answer: The high correlation between two variables is called multicollinearity. Multicollinearity
results in the standard errors of the coefficients of the independent variables to be inflated,
yielding statistically insignificant t-statistics. One could drop one of the two variables and re-
estimate the regression model to examine the change in the statistical significance of the
remaining regression coefficients.
Diff: 2
12
Scenario 2: Below is a multiple regression in which the dependent variable is market value of
houses and the independent variables are the age of the house and square footage of the house.
The regression was estimated for 42 houses.
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.745495
R Square 0.555762
Adjusted R Square 0.532981
Standard Error 7211.848
Observations 42
ANOVA
df SS MS F Significance F
Regression 2 2537650171 1.27E+09 24.39544 1.3443E-07
Residual 39 2028419591 52010759
Total 41 4566069762
Coefficients
Standard t Stat P-value Lower 95% Upper 95%
Error
Intercept 47331.38 13884.34664 3.408974 0.001528 19247.6673 75415.0958
House Age -825.161 607.3128421 -1.35871 0.182046 -2053.5662 403.243744
Square Feet 40.91107 6.696523994 6.109299 3.65E-07 27.3660835 54.4560534
58) Refer to Scenario 2. What is the estimated regression equation for determining the market
value of houses?
Answer: Market Value = 47331.38 - 825.161 House Age + 40.91107 Square Feet
Diff: 1
59) Refer to Scenario 2. If the age of a house is 25 years with 1,500 square feet, what is the
estimated market value of the house?
Answer: Market Value = 47331.38 - 825.161(25) + 40.91107(1,500) = $88,068.96
Diff: 2
60) Refer to Scenario 2. What percentage of the variation in the dependent variable, Market
Value, is explained by the regression model?
Answer: The coefficient of determination is .555762 or 55.5762 percent of the variation in
Market Value is explained by the regression model.
Diff: 1
61) Refer to Scenario 2. If the age of a house increases by 1 year given that the square feet is
held constant, what is the impact on the house's market value?
Answer: The Market Value would decrease by $825.16.
Diff: 1
13
62) Refer to Scenario 2. By examining the t-statistics associated with the regression coefficients,
at the 5 percent significance level, which of the two independent variables are statistically
different from zero?
Answer: Square Feet is the only statistically significant independent variable.
Diff: 2
63) Refer to Scenario 2. Based on the 95 percent confidence intervals for each of the partial
regression coefficients, which independent variable is statistically different from zero and why?
Answer: The 95 percent confidence interval for the coefficient on House Age is -2053.5662 to
403.243744 and the 95 percent confidence interval for the coefficient on Square Feet is
27.3660835 to 54.4560534. Since, zero resides in the confidence interval for the coefficient on
House Age, one can conclude that the coefficient is not statistically different from zero.
Diff: 3
64) Refer to Scenario 2. What are the units of measurement for the standard error of the
estimate?
Answer: The standard error of the estimate is always in the same units as the dependent variable,
in this case dollars, specifically $7,211.85.
Diff: 2
65) Elaborate on the statement "Every multiple regression analysis is influenced by the sample of
the data used."
Answer: The analyst wants to estimate behavioral relationships that can be generalized beyond
the sample of observations included in the analysis. Yet large-scale data collection can be very
expensive and time-consuming. Thus, the analyst must be concerned that the estimated
relationships may hold only for the sample of data analyzed, and not the larger population.
Diff: 2
66) Briefly explain why empirical consumer demand studies such as Patrick McCarthy's study of
automobile demand are relevant to managers.
Answer: Such studies illustrate the types of data available for analyzing the demand for different
products. In many instances, data sources such as industry and consumer surveys that researchers
discover may not have been widely known. Also, empirical demand studies usually provide a
discussion of previous studies and demonstrate how researchers conceptualize the problem of
estimating the demand for a particular product.
Diff: 2
14
67) Why are estimated models of demand and consumer behavior useful to managers?
Answer: Such demand studies may provide insights in the development of competitive strategies
by highlighting the importance of the characteristics influencing the demand for different
products and by showing what trade-offs consumers may be willing to make between
characteristics.
Diff: 2
15

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Economics for Managers, 3e (Farnham)

Chapter 4 Techniques for Understanding Consumer Demand and Behavior

1) Which of the following approaches to understanding and predicting consumer behavior

3) All of the following are limitations of direct consumer surveys except:

6) Which of the following approaches to understanding and predicting consumer behavior

7) Which of the following statements is correct?

8) An approach to analyzing consumer behavior in which consumer reaction to different prices is

11) Cross-sectional data observed at several points in time is known as:

21) The F-statistic is an alternative measure of goodness-of-fit of an estimated regression

QXYZ = 4.46 + .304 PXYZ

Coefficient Standard Error

31) Refer to Scenario 1. What is the coefficient of determination?

34) In a multiple regression problem involving two independent variables, if b1 is computed to

35) A constant-elasticity demand function can be obtained by:

43) The intercept of the equation: Y = .09 + 1.5X is 1.5.

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