Managerial Economics (GCM6213)

Assignment 1

Question 1 – Simple Linear Regression

Dark Scarves is a leading design house and is well known for its haute couture scarves that
are made for discerning ladies with deep pocket husbands. Dark has recently embarked on a
new distribution strategy by appointing 200 sales agents throughout Malaysia. Miss Bibi, the
fashion house founder has collected Sales and Advertising data for all Dark’s agent for the
past 6 months and she has appointed you to help her analyze the data (Appendix: Table 1).
Miss Bibi also have a few questions for you to answer:

a) She wonders if agent’s advertising expenditure really helps to increase sales.

Yes, by providing higher agent’s advertising expenditure really are helping to increase
sales as this will enable them to prepare exclusive posters and flyers. Besides, they can go
to several places for advertising instead of focusing at one point.

b) How much semi-annual sales would an agent make if he/she spends RM500 on advertising.

Qd = 3387.48837641956 + (11.7447768937779 x 500)

= RM 9,260

c) If there is indeed a relationship between sales and advertisement, how much does an agent
need to spend on ads to generate RM10,000 in sales.

10,000 = 3387.48837641956 + (11.7447768937779 x Ads)

10,000 - 3387.48837641956 = 11.7447768937779 x Ads
6612.51162358044 = 11.7447768937779 x Ads
6612.51162358044 ÷ 11.7447768937779 = Ads
563.0172189 = Ads

(HINT: run a simple linear regression and write the model equation down)
Question 2 – Multiple Linear Regression

Early in 2008, the Rangkaian Pengangkutan Integrasi Deras Sdn Bhd (Rapid), a company
responsible for serving the light rail transit (LRT) needs of a large Eastern city, was faced
with rising operating deficits on its system. Also, because of a fiscal austerity program at both
the federal and state levels, the hope of receiving additional subsidy support was slim.
The board of directors of Rapid asked the system manager to explore alternatives to alleviate
the financial plight of the system. The first suggestion made by the manager was to institute a
major cutback in service. This cutback would result in no service after 7:00 P.M., no service
on weekends, and a reduced schedule of service during the midday period Monday through
Friday.

The board of Rapid indicated that this alternative was not likely to be politically acceptable
and could only be considered as a last resort. The board suggested that because it had been
over five years since the last basic fare increase, a fare increase from the current level of RM1
to a new level of RM1.50 should be considered. Accordingly, the board ordered the manager
to conduct a study of the likely impact of this proposed fare hike.
The system manager has collected data on important variables thought to have a significant
impact on the demand for rides on Rapid. These data have been collected over the past 27
years and include the following variables (Appendix: Table 2):

 Price per ride (in cents)

 Population in the metropolitan area serviced by Rapid
 Disposable per capita income
 Parking rate per hour in the downtown area (in cents)

Using the given data, answer the following questions:

a) What is the dependent variable in this demand study?

The Dependent variable is ridership. For this study, ridership is labeled Y and is measured
in thousands.

b) What are the independent variables?

The independent variables are price, population, income, and parking rates. For this study,
they are labeled P, T, I, & H, respectively. P is measured in cents. T is measured in
thousands of residences. I is measured in RM. H is measured in cents.

c) What are the expected signs of the variables thought to affect transit ridership on Rapid?

Variable Label Variable Increase Variable Decrease

Price P Ridership Decrease Ridership Increase
Population T Ridership Increase Ridership Decrease
Income I Ridership Increase Ridership Decrease
Parking Rates H Ridership Increase Ridership Decrease

d) Using a multiple regression technique, estimate the coefficients of the demand model for
Rapid rides.
 Variables Coefficients
Intercept 85.43924099
Price (P) per Ride (Cents) -1.617484194
Population (T) ('000) 0.643769498
Income (I) -0.047474815
Parking Rate (H) (Cents) 1.943790812

e) Interpret the result of the regression model.

Variables Coefficients Economic Interpretation

Price (P) per Ride (Cents)
Population (T) ('000)
Income (I)
Parking Rate (H) (Cents)
-1.617484194 Price has a negative impact on the demand for
ridership. One cent increase in price will result
into decrease in Ridership by 1617
0.643769498 Population has a positive impact on the demand
for ridership. As Population Increases by 1000,
the ridership increase by 644
-0.047474815 Income has a negative impact on the demand
for ridership. As Income rises by one unit the
Ridership will decrease by 47.
1.943790812 Paring Price has a positive impact on the
demand for ridership. As Parking Rates
Increases by one cent the ridership increase by
1944