Bobs Underground a limited liability corporation specializin

Bob’s Underground, a limited liability corporation specializing in new rap artists (B.U. LLC, rap) has the following demand function:

Q=a+bP+cM+dR

where Q is the quantity demanded of the most popular product B.U. sells, P is the price of that product, M is income, and R is the price of a related product. The regression results are:

Adjusted R2 0.7711

Question 16

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Question text

a.) Do you think these regression results will generate good sales estimates for B.U. LLC, rap?

a. Yes; the parameter estimates have expected signs, the individual coefficients (besides the intercept) are statistically significant at the 5% level, and the R2 is high.

b. No; the estimated coefficient for R2 should be positive, not negative.

c. No; though the R2 is good and the variables have the expected signs, the estimated coefficients are not statistically significant at the 10% level.

d. Yes, except that the R2 is too low to be convincing. The rest of the results (p-values, expected signs) are satisfactory.

b.) If M increases by 3%, what would happen (in percentage terms) to quantity demanded?

a. Q falls by 0.6%.

b. Q increases by 3%×3%=0.09%.

c. Q increases by 3%×1.239=3.72%.

d. Q decreases by 3%×?0.478=?0.014.

Solution

a. Option d, since the p-values of all coefficients are lesser than 0.05, the coefficients are significant at 95 % level. But R squared value needs to be improved further as the equation is able to capture only it is 77.11 percent of variation.

b. Option b, for one percent increase in income the quantity increases by 0.0063 percent and for 3 percent it is 0.03 which is equal to 0.09%