Question

KAD has estimated the following demand relationship for its product over the last four years, using monthly observations:

ln Qt = 4.932 - 1.238 ln Pt +1.524 ln Y_t-1 + 0.4865 ln Q_t-1

(2.54) (1.38) (3.65) (2.87)

R² = 0.8738

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 £12, income last month was £30,000 and sales last month were 2,980 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 7 per cent in general terms, estimate the effect on sales, stating any assumptions.

Answer 1