Question

Where are C, D, and E?

General Cereals is using a regression model to estimate the demand for Tweetie Sweeties, a whistle-shaped, sugar-coated breakfast cereal for children. The following log-log demand function is estimated using data for each month during the last five years. Q = quantity purchased in 10 oz boxes, P = price per 10 oz box in dollars, A = Tweetie Sweeties advertising expenditures on daytime television in dollars, and N = the proportion of the population under 12 years old.

Ln (Q) = 8.745 – 2.15*ln(P) + 1.05*ln(A) + 3.70*ln(N)

The adjusted R-squared is 0.85; absolute value of t-statistics for all estimated coefficients are over 2, and the p-value of each estimated coefficient is below 0.05. Based on this estimated regression, answer the following questions.

(c) If the proportion of population under 12 increases by 1%, what is your forecast of percentage change in the quantity demanded of Tweetie Sweeties?

(d) General Cereals cost of production is TC=500 + 1.50*Q. Given the regression results, what price should General Cereals charge for Tweetie Sweeties?

(e) How might General Cereals improve the accuracy of the estimated coefficients? To answer this, use the consumer choice model for guidance on adding important demand factors.

Answer 1

c. Since the coefficient of Ln N is 3.70, thus when proportion of population under 12 increases by 1 per cent, the change in quantity demanded of tweetie Sweeties is 3.70.

d. Since price of the firm is equal to marginal cost of the firm, thus, price that General Cereals should charge for Tweetie Sweeties is $`.50.

e. The additional factors that can be included to improve the accuracy of the estimated coefficients is income level of the consumer, price of complement and substitute goods, expectations of consumer regarding future price level of the commodity.