Unit VI - Economics for Managers

Nguyễn Ngọc Anh

Columbia Southern University
Unit 4 – Case Study Summary Demand Estimation for
Mrs. Smyth’s Pies
 Mrs. Smyth's initiated an empirical estimation of demand for its gourmet frozen fruit pies.
 Data is collected quarterly over two years.
 Collected areas: sales quantity (Q), the retail price charged for the pies (P), local advertising
and promotional expenditures (A), and the price charged by a major competing brand of
frozen pies (PX), median dollars of disposable income per household (Y), population of the
market area (Pop).
 The following regression equation was fit to these data
Qit = b0 + b1Pit + b2Ait + b3PXit + b4Yit + b5Popit + b6Tit + uit
 T : the trend factor
 u : a residual (or disturbance) term
Signposting
 Part A: Describe the economic meaning and statistical
significance of each individual independent variable included in
the Mrs. Smyth's frozen fruit pie demand equation
 Part B: Interpret the coefficient of determination (R2) for the Mrs.
Smyth's frozen fruit pie demand equation
 Part C: Use the regression model and 2007-4 data to estimate
2008-1unit sales in the Washington-Arlington-Alexandria market.
 Part D: To illustrate use of the standard error of the estimate
statistic, derive the 95 percent and 99 percent confidence intervals
for 2008-1unit sales in the Washington-Arlington-Alexandria
market
A1. Economic meaning of each individual independent
variable
 The regression model can be generated to any number of independent
variables as indicated in the following regression equation:
Y = a + b1X1 +b2X2 + b3X3 + b4X4 + b5X5 + b6X6
 Based on the given coefficient of variables of Mrs. Smyth’s Pies,
Intercept: a = 529,774; Price (P): b1 = -122,607
Advertising (A): b2 = 5.838; Competitor Price (PX): b3 = 29,867
Income (Y): b4 = 2.043; Population (Pop): b5 = 0.030
Time (T): b6 = 2,815
 The Mrs. Smyth’s frozen fruit pie demand regression equation:
Q = 529,774 -122,607P + 5.838A + 29,867PX + 2.043Y + 0.030Pop + 2,815T
A1. Economic meaning of each individual independent
variable
 The standard Error of Coefficient (SD) are used to measure the precision
of the estimate of the coefficient :
 SD of Intercept: 271,331;
 SD of P: 16,422;
 SD of A: 1.65;
 SD of PX: 13,449;
 SD of Y: 3.762;
 SD of Pop: 0.004
 SD of T: 4,539.
A1. Economic meaning of each individual independent
variable
 Dependent variable Q: the quantity of frozen fruit pies sold during the
quarter (unit)
 Independent variables:
 P: retailed price (dollars)
 A: Advertising expenditure (dollars)
 PX: price charged by competing pies with the same quality (dollars)
 Y: disposable income of the households (dollars)
 Pop: population in the market area (people)
 T: trend factors (quarter)
Q will be changed based on the effect of each independent variable P, A, PX, Y,
Pop or T.
A1. Economic meaning of each individual independent
variable
Q = 529,774 -122,607P + 5.838A + 29,867PX + 2.043Y + 0.030Pop +
2,815T
1. The economic meaning of relation between the retail price of Mrs.
Smyth’s frozen pies (P) and the quantity demanded for this pie (Q):
 According to the law of demand, if all other factors being constant, price
and quantity demanded for any product or service will have inverse
relationship that means the price coefficient should be negative (Keat &
Young, 2009)
 Pt: the negative sign for the P variable mentioned in the equation above
has showed this inverse relationship where the price increases by 1 USD,
the quality demanded for Mrs. Smyth’s frozen pies will be reduced by
122,607 units, other things being equal or unchanged.
 A1. Economic meaning of each individual independent
variable
2. The economic meaning of relation between the advertising
expenditures of Mrs. Smyth’s frozen pies (A) and the quantity
demanded for this pie (Q):
 The Advertising coefficient (A) is always expected to be positive, which
means the advertising expenditures of Mrs. Smyth’s frozen pies have a
direct relationship with the quantity demanded for this pie.
 At: the positive of advertising coefficient showed that the quantity
demanded for frozen fruit pie will increase if that company invests more
money on advertising when other factors are unchanged. If advertising
expenses increases by 1 USD, the quantity demanded of the frozen fruit
pie will increase 5.838 (or 6) units other things being equal or
unchanged.
A1. Economic meaning of each individual independent
variable

3. The economic meaning of relation between competitor’s price

(PX) and the quantity demanded for Mrs. Smyth’s frozen pies
(Q):
 In the above regression equation, the coefficient sign for competitor’s
price is positive means when competing price changes, the quantity
demanded of frozen fruit pies will change in the same direction.
 PXt: the quantity demanded for frozen fruit pie will increase 29,867
units if the price of the competitor’s product increases 1 USD and of
course other things are equal or unchanged.
 A1. Economic meaning of each individual independent
variable
4. The economic meaning of relation between disposable income variable (Y)
and the quantity demanded for Mrs. Smyth’s frozen pies (Q):
 According to Keat & Young (2014), an inferior good is a type of good that
decreases in demand when income rises. Conversely, demand for these goods will
increase when income falls. A normal good is any good that increases in demand
when income increases .
 The sign of Y coefficient is positive, which means that the product is normal. It
means the quantity demanded of frozen fruit pies will change in the same direction
when disposable income per household (Y) changes. If the income increases, there
will be a greater demand of Mrs. Smyth’s frozen fruit pie and vice versa.
 In detail, if the income increases 1 USD, the quantity demanded of frozen fruit
pies is expected to increase 2,043 units while others are equal or unchanged.
 A1. Economic meaning of each individual independent
variable
4. The economic meaning of relation between disposable income variable (Y)
and the quantity demanded for Mrs. Smyth’s frozen pies (Q):
 According to (Keat & Young, 2014), an inferior good is a type of good that
decreases in demand when income rises. Conversely, demand for these goods will
increase when income falls. A normal good is any good that increases in demand
when income increases .
 The sign of Y coefficient is positive, which means that the product is normal. It
means the quantity demanded of frozen fruit pies will change in the same direction
when disposable income per household (Y) changes. If the income increases, there
will be a greater demand of Mrs. Smyth’s frozen fruit pie and vice versa.
 In detail, if the income increases 1 USD, the quantity demanded of frozen fruit
pies is expected to increase 2,043 units while others are equal or unchanged.
A1. Economic meaning of each individual independent
variable

5. The economic meaning of relation between population (Pop) and the

quantity demanded for Mrs. Smyth’s frozen pies (Q):
 As noted by (Keat & Young, 2014), one of the important determinants of
demand is the number of buyers. If the population rises, the number of buyers
increase and lead to the demand for the product or the quantity demanded to
increase. Therefore, the sign of population coefficient is expected to be
positive.
 Popt: the positive sign of Pop coefficient indicates that the population
increases, the pie quantity demanded will increase. Therefore, if the population
increases by 1 unit, the quantity demanded for the pie will increase 0.03 unit
while others are equal or unchanged.
A1. Economic meaning of each individual independent
variable

6. The economic meaning of relation between time variable (T) and the
quantity demanded for Mrs. Smyth’s frozen pies (Q):
 In the competitive business environment, any firm always sets the increase on
their revenue and the decrease on cost to ensure the efficiency of their business
and the growth which requires them to develop their efficient strategic
decisions to compete the competitors and achieve their goals. Therefore, when
the time increases, the quantity demanded should be expected to increase,
which leads the sign of time variable to be positive.
 Tt: the time coefficient is positive and if time increases 1 quarter, the quantity
demanded for the pie will increase 2,815 units and other things are equal or
unchanged.
A2. Statistical significance of each individual independent
variable

1. Statistical significance of each individual independent variable:

 Use t-tests to determine statistical significance of each individual independent
variable.
 The degree of freedom: df=n-k-1
where n: the number of observations, n=48 (from given data)
k: number of variables in the equation, k= 6 (6 areas)
 df= 48-6-1=41
 Using Table A.4 (Keat, Young & Erfle, 2014, p. 601), with df = 41, level of
confidence of 95%, we have: t-critical of One-tail is 1.684; and t-critical of
Two-tail is 2.021.
A2. Statistical significance of each individual independent
variable

2. Statistical significance of each individual independent variable:

Value of t of each variable:
 t(P) = beta(P)/ SEC = 122,607/16,422 = 7.47 > t-critical  the Price variable
has statistical significance at 95% level of confidence.
 t(At) = beta (At)/SEC = 5.838/1.65 = 3.54 > t-critical  the Advertising
variable has statistical significance at 95% level of confidence.
 t(PX) = beta (PX) = 29,867/13,449 = 2.22 > t-critical  the variable of
competing price has statistical significance at 95% level of confidence.
A2. Statistical significance of each individual independent
variable
3. Statistical significance of each individual independent variable:
Value of t of each variable:

 t (Yt) = beta (Y) = 2.043/3.672 = 0.54 < t-critical  the income variable has

NO statistical significance at 95% level of confidence..

 t (Pop) = 7.5 > t-critical  the variable of population in the market area has

statistical significance at 95% level of confidence.

 t (T) = 0.62 < t-critical  the variable of time trend has NO statistical

significance at 95% level of confidence.

A2. Statistical significance of each individual independent
variable
Conclusion
 The result economic meaning and statistical significance are only matching
correctly with this case study figures.
 In order to apply for future result/estimate  must test (there are three kinds of
test)
 Statistical tests of significance of each variable result must be more than 2
less than 2 need check in table
 If we use the demand equation for future estimation we can not use 2
variables Income and Time  consider the as constant
 B. Meaning of Coefficient of determination (R2)
 Coefficient of determination R2 is another importance statistical indicator used

to evaluate the regression results.

 R2 can be as low as 0 which indicates that the variations in the dependent

variable are not accounted for by the variation in the explanatory variables and

can be as high as 1.0 where all the variations in the dependent variable can be

accounted for by the variation in the explanatory variables.

 The closer R2, is to 100% , the better the explanatory power of the regression

equation.
 B. Meaning of Coefficient of determination (R2)
 From data in the Table 5.4 (provided data), the value of coefficient of
determination R2 for the Mrs. Smyth’s frozen fruit pie is 87.1%. It means that

 87.1% of changes in the dependent variable of the quantity demanded of

frozen fruit pies Q can be explained by the retail price charged for the pies
(P), local advertising and promotional expenditures (A), and the price
charged by a major competing brand of frozen pies (PX), median dollars of
disposable income per household (Y), population of the market area (Pop).

 The other 12.9 % of changes in Q might be explained by other factors not in

regression equation.
C. Estimation of 2008-1unit sales in the Washington –Arlington
– Alexandria market
 Use the regression model and 2007-4 data to estimate the 2008-1 unit sales in the
Washington-Arlington-Alexandria market.
 Refer to data 2007-4 (excel file), the price of Mrs. Smyth’s frozen pies is $7.95; advertising
expenditures is $30,487. The prices of competing pie is $5.69; median disposable income per
household is $53,235; population in the market area is 5,445,382 people, time variable is 8.
 Time variable for 2008-1 is 9

 Applying the above data to regression equation:

529,744 – 122,607*Pt + 5.838*At + 29,867*PXt + 2.043*Yt + 0.03*Popt + 2,825*Tt
Q(2008-1) = 529,744 – 122,607*7.95 + 5.838*30.487 + 29,867*5.69 + 2.043*53.235 +
0.03*5,445,382 + 2,825*9

Q = 200,490 units

The 2008-1 Unit sales is estimated as: Q = 200,490 units regression equation.
C. Estimation of 2008-1unit sales in the Washington –Arlington
– Alexandria market
 Use the regression model and 2007-4 data to estimate the 2008-1 unit sales in the
Washington-Arlington-Alexandria market.
 Refer to data 2007-4 (excel file), the price of Mrs. Smyth’s frozen pies is $7.95;
advertising expenditures is $30,487. The prices of competing pie is $5.69; median
disposable income per household is $53,235; population in the market area is
5,445,382 people, time variable is 8.
 Time variable for 2008-1 is 9
 Applying the above data to regression equation:
529,744 – 122,607*Pt + 5.838*At + 29,867*PXt + 2.043*Yt + 0.03*Popt +
2,825*Tt
Q(2008-1) = 529,744 – 122,607*7.95 + 5.838*30.487 + 29,867*5.69 +
2.043*53.235 + 0.03*5,445,382 + 2,825*9
Q = 200,490
The 2008-1 Unit sales is estimated as: Q = 200,490 units regression equation.
 D. Illustration the use of standard error of the estimate
statistic
 In order to illustrate use of standard error of the estimate statistic, derive the
95% and 99% confidence intervals for 2008-1 unit sales in the Washington –
Arlington – Alexandria market, the following information is identified:
 From Table 5.4, Standard Error of Estimate (SEE) is 67,584
 According to Zikmund, Babin, Jon C, Carr, & Griffin (2013):
The confidence interval = X+/- Zcl*Sx
Where: X mean value; Zcl: Z-value (Table A.2 Page 598); Sx: the standard
error of the estimate
 To this case, the confidence interval is measured by:
Confidence interval = Q +/- Zcl*67,584
 D. Illustration the use of standard error of the estimate
statistic
 At level of confidence of 95%:
Zcl = 1.96: (Table A.2 page 598; 0.95/2 = 0.475)
Confidence Interval = 200,490 +/- 1.96*67584
 Range: from 68,025 to 332,955

In other words, at 95% level of confidence, we can expect that the unit sales
in 2008-1 quarter is in the range from 68,025 to 332,955 units. The regression
model needs to be more precise.
 D. Illustration the use of standard error of the estimate
statistic
 At level of confidence of 99%:
Zcl = 2.57 (Table A.2 page 598; 0.99/2 = 0.495).
Confidence Interval = 200,490 +/- 2.57*67584
 Range: from 26,799 to 374,181 units

In other words, at 99% level of confidence, we can expect that the unit sales
in 2008-1 quarter is in the range from 26,799 to 374,191units. The regression
model needs to be more precise.
 Conclusion
 The result economic meaning and statistical significance are only
matching correctly with this case study figures.
 In order to apply for future result/estimate  must test (there are
three kinds of test)
 Statistical tests of significance of each variable result must be more
than 2 less than 2 need check in table
 If we use the demand equation for future estimation we can not
use 2 variables Income and Time  consider the as constant
 Coefficient of determination R2 is another importance statistical
indicator used to evaluate the regression results.
 Conclusion

 Statistical evaluation of regression results are based on the data

collected from time to time.
 Analyzing the regression results helps to estimate the demand for a
particular goods or service.
 Dependent and independent variables should be identified first to
collect data.
 The regression model needs to be more precise.
 Reference
 Keat, P. G., Young, P. K. Y., & Erfle, S. E. (2014). Managerial
Economics: Economic Tools for Today’s Decision Makers (7th ed.).
Harlow, England: Pearson.

 Zikmund, W. G., Babin, B. J., Carr, J. C., & Griffin, M. (2013).

Business Research Methods, 9th International Edition. South- Western
Cengage Learning, Canada.