Managerial Economics

Problem Set 2

Submission Date October 04

Q1. The following data relate to the sales of a product over an eight-month
Period:

a. Investigate whether sales are affected more by the level of price or by the change in price of
the product.
b. Interpret the regression coefficient of the explanatory variable.
c. Draw an appropriate graph of the data and relationship.
d. Forecast sales in September if price is £65.

Q2. AIKON Inc. has recently carried out a survey of the demand for their mobile phones. They
observed the following over the last fifteen months:

a. Estimate three appropriate demand curves.

b. Why is it necessary to estimate three different demand curves?
c. Estimate sales when the price is £50 and advertising is £100,000, stating any assumptions that
you need to make.
d. If the firm charges £50 but increases advertising to £110,000, what conclusions can you derive
in terms of revenues and profit?
Q3. KAD has estimated the following demand relationship for its product over the last four
years, using monthly observations:

Where Q=sales in units, P=price in £, Y is income in £,000, and the numbers

in brackets are t-statistics.
a. Interpret the above model.
b. Make a sales forecast if price is £9, income last month was £25,000 and sales last month were
2,981 units.
c. Make a sales forecast for the following month if there is no change in price or income.
d. If price is increased by 5 per cent in general terms, estimate the effect on sales, stating any
assumptions.