Question

Suppose that you estimate the following regression:

SALES = 5.467-1.034(PRICE)

A) How do you interpret the coefficient on price, assuming price is denominated in dollars and sales are denominated in 1000s of units?

Answer 1

A)

SALES = 5.467-1.034(PRICE)

Here

5.467 is the intercept and

-1.034 is the slope

Here slope is negative. Thus, the direction of the slope is negative.

It shows that there is a negative linear relationship between price and sales.

that is, as the price increases the Sales decrease

The magnitude of slope is 1.034

The value 1.034 implies as the price increases by $1, the Sales will decrease by 1.034 thousands of units

e.g.

if price is $1, then

SALES = 5.467-1.034(1) = 4.433 thousand units = 4433 units

If price increases by $1 to $2, sales will decrease by 1.034 x 1000 = 1034 units

SALES = 5.467-1.034(2) = 3.399 thousand units = 3399 units