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Microeconomics Assignment 1: I 2i 3i 4i

The document describes a log estimation model developed to understand demand for low-cost biscuits. It provides the equation, variables, sample size, R-squared value, and t-statistic calculations. It interprets the coefficients and finds price of biscuits, substitute price, and daily wages to be statistically significant predictors of demand. An example calculation shows price elasticity of demand is -2.85 when biscuit price is Rs. 5. The second part discusses a trend line model to forecast sales. It shows the 2016 sales prediction and adjusts it based on the average over/underprediction adjustment factors. It concludes the company should expand in 2020 to meet its 220 million rupee sales target.

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Yash Agarwal
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98 views

Microeconomics Assignment 1: I 2i 3i 4i

The document describes a log estimation model developed to understand demand for low-cost biscuits. It provides the equation, variables, sample size, R-squared value, and t-statistic calculations. It interprets the coefficients and finds price of biscuits, substitute price, and daily wages to be statistically significant predictors of demand. An example calculation shows price elasticity of demand is -2.85 when biscuit price is Rs. 5. The second part discusses a trend line model to forecast sales. It shows the 2016 sales prediction and adjusts it based on the average over/underprediction adjustment factors. It concludes the company should expand in 2020 to meet its 220 million rupee sales target.

Uploaded by

Yash Agarwal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Microeconomics Assignment 1

Answer 1

Given:

A log estimation program designed by a consultancy organization to understand demand for low-
cost biscuits produced by its client, a prominent fast foods major company.

Equation: log Yi = 9.05 – 0.57 X2i + 0.4 X3i - 0.012 X4i

Standard Error: (1.02) (0.10) (0.15) (0.0048)

R2 = 0.81; n =50

Critical t-stat: 2.03

where

X2i - Price of low-cost biscuits

X3i - Price of a close substitute

X4i - Daily Wages

Yi- Demand for low cost biscuits

Interpretation of the model:

1. Checking the n value: n= 50

Since, n > 30

Therefore, the value of n is reasonable

2. Checking the R2 value: R2 = 0.81:

Since, 0.6 < R2 < 0.92 and

Therefore, the value of R2 is reasonable

3. Calculation of t-stat value:

t-stat value = (Coefficient Value)/Standard Error

Critical t stat value = 2.03

For X1: t-stat = (-0.57) / (0.1) = -5.7

| t-stat | = 5.7

For X2: t-stat = (0.4) / (0.15) = 2.66


| t-stat | = 2.66

For X3: t-stat = (-0.012) / (0.0048) = 2.5

| t-stat | = 2.5

For intercept: t-stat = (9.05) / (1.02) = 8.87

| t-stat | = 8.87

4. Decision Rule:

If | t-stat | > 1.96, the corresponding Xi’s are statistically significant.

For X1i: 5.7> 1.96

Therefore, X1i is statistically significant

For X2i: 2.66> 1.96

Therefore, X2i is statistically significant

For X3i: 2.5> 1.96

Therefore, X3i is statistically significant

For intercept: 8.87> 1.96

Therefore, the intercept is statistically significant

5. Slope Interpretation:

Rule: Only if X is statistically significant, the slope is interpreted.

6. Estimation of the relation between X and Y:

We have, log Yi = 9.05 – 0.57 *X2i + 0.4 *X3i – 0.012*X4i

Differentiating both sides w.r.t X2i we get keeping other variables constant,

(1/Yi) * d(Yi)/dX2i = – 0.57

or, d(Yi)/Yi = –0.57 * dX2i

Multiplying both sides by 100 we get;

=> percent change in Yi = 100 * (– 0.57 * dX2i)

Thus, when X2i increases by 1-unit, other factors kept constant, Yi decreases by 57%

Similarly,

When X3i increases by 1-unit, other factors kept constant, Yi increases by 40%
When X4i increases by 1-unit, other factors kept constant, Yi decreases by 1.2%

What would be the average price elasticity of demand for the biscuit brand when the price of the
biscuits (X2i) is Rs. 5? Please show the working for the problem.

log Yi = 9.05 – 0.57 * X2i + 0.4 * X3i – 0.012 * X4i

dy
dy
Percent change ∈Y Y ∗x
Elasticity = Percentage change∈X = dx = dx
Y
x

Assuming X3i and X4i to be constant,

Step 1: Differentiating both sides with respect to X2i

1 dy
y dx( 2) = – 0.57

Step 2: Multiply both sides by Yi

dy
dx (2) = – 0.57

x(2)
Step 3: Multiply both sides by y
dy x(2)
dx (2) * = – 0.57 * X2i
y

Therefore, answer = – 0.57* 5 = – 2.85

Average Price Elasticity of Demand = – 2.85


Answer 2

Cumulative Cumulative
Average of Average of
Overpredicted Underpredicted
values values
1.063240015 0.953389139
200.00000
St = 113.14 +
180.00000
f(x) = 9.71 x + 113.14
R² = 0.78 9.71*t
160.00000

140.00000

120.00000

100.00000

80.00000

60.00000

40.00000

20.00000

0.00000
0 1 2 3 4 5 6 7 8

Trend Line Scatter Plot


i) As we see from the data, predicted sales

from the trend line turns out to be 190.82

million in 2016. But we also observe a pattern repeating from the trend line plot. Thus, we
adjust the values by calculating the average adjustment factor for under and over predicted

values respectively. As we see from the trend line plot, the sales value for 2016 will be under-

predicted. Thus, we arrive at the adjusted sales value of 2016 by multiplying the predicted

value by 1.06324 to get a sales value of 202.887 million.

ii) Since the company will undertake expansion upon reaching a sales target of 220 million

rupees, we see that the company should expand in the year 2020.

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