#### Question Details

(solution) Discussion Board Week 2 1. "Estimating Demand and Its

Discussion Board Week 2

**1. "Estimating Demand and Its Elasticities" and Statistical Estimation of the Demand CurveECO550 Week 2 Scenario Script: Models of Supply and Demand, and Non-Price**

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**Determinants of Each**

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**Slide # Topics Slide 1 Scene 1 Narration An older cottage style family run**

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**business (Katrina?s Candies)**

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**Slide 2 Scene 2**

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**Herb and Maria are in Herb?s office**

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**reviewing the demand model Herb and**

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**Renee formulated and discussing the**

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**data Maria compiled for estimating the**

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**model. ECO550_2_2_Herb-1:Good day,**

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**Maria. Thanks for responding so**

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**quickly to my request for data.**

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**ECO550_2_2_Maria-1:Hello, Herb.**

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**No problem, I am assigned to the team**

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**to help with the data so when I received**

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**your email, I started looking for the data**

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**immediately.**

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**ECO550_2_2_Herb-2:Fantastic. Let?s**

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**get started by reviewing the data you**

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**compiled. Then you can explain how I**

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**can use Excel to estimate the model.**

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**ECO550_2_2_Maria-2:First, would**

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**you review the model with me? I need**

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**to understand how the model is setup.**

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**ECO550_2_2_Herb-3:Oh, okay.**

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**Recall from our team meeting that the**

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**team?s task is to provide Ken with**

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**information he can use to respond to the**

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**Board of Directors? request to expand**

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**Katrina?s into international markets.**

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**ECO550_2_2_Maria-3:Yes, I do recall**

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**that.**

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**ECO550_2_2_Herb-4: Renee and I**

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**met after the team meeting and decided**

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**the best way to proceed is to build a**

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**model of the demand for Katrina?s new**

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**sugar-free-chocolate candy then use the**

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**model to predict the demand. In the**

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**model, the quantity of Katrina?s sugarfree-chocolate candy is the dependent variable and there are five**

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**independent variables. Show the 5 variables on projector:**

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**Price of Katrina?s Sugar Free**

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**Chocolate;**

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**Price of the substitute good;**

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**Complementary good;**

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**Income;**

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**Number of buyers in the market. ECO550_2_2_Maria-4: Very**

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**interesting! Could you please go over**

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**these five independent variables with**

** **

**me?**

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**ECO550_2_2_Herb-5: Sure! The first**

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**independent variable is theprice of**

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**Katrina?s sugar-free chocolate. The**

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**model must include the price of sugarfree-chocolate; otherwise, there is no**

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**demand curve.**

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**Next is the price of the substitute good.**

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**In the case of chocolate, caffeinated**

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**coffee is the substitute good. Then there**

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**is the complementary good; for**

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**Katrina?s model, we selected bottled**

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**water; therefore the price of bottled**

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**water is the next independent variable.**

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**Income is another variable typically**

** **

**included in a demand curve. For our**

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**model, we selected median household**

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**income.**

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**Last, since we are interested in the**

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**market for Katrina?s sugar-freechocolate, the number of buyers in the**

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**market is included as an independent**

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**variable.**

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**ECO550_2_2_Maria-5: Thanks for**

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**going over that. You and Renee were**

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**certainly busy!**

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**ECO550_2_2_Herb-6: Yes, we were! I**

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**am going to use the data you provided**

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**to estimate the model to see if we**

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**selected the right set of determinants.**

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**Then, Renee and I can use the model to**

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**develop other measures that tell us more**

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**about the market for Katrina?s sugarfree-chocolate. Slide 3 Scene 3**

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**In Herb?s office to explain concept of**

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**estimation**

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**Shows the model on the projector ECO550_2_3_Maria-1:You mentioned**

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**a lot of terms that are sort of new to me.**

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**In this case what does ?estimate? mean?**

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**ECO550_2_3_Herb-1:Here this may**

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**help with the concept of estimation,**

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**here?s what the finalized model should**

** **

**look like. We will talk about the actual**

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**estimation process in a few moments.**

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**ECO550_2_3_Maria-2: I?m not too**

** **

**sure of what this model contains, could**

** **

**you explain further? Show on the projector: The notation on**

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**the left side of the equal sign,**

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**Qsubscript-d-k-s-f-c represents the**

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**dependent variable ECO550_2_3_Herb-2: Gladly! The**

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**notation on the left side of the equal**

** **

**sign, Q subscript-d-k-s-f-c represents**

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**the dependent variable which is the**

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**quantity of Katrina?s sugar-freechocolate candy. The terms on the**

** **

**right-side of the equal sign are the**

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**independent variables I just explained.**

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**ECO550_2_3_Maria-3: That makes a**

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**lot more sense now! Where does the**

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**estimation process come into play?**

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**ECO550_2_3_Herb-3: Estimating the**

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**model means to find values for the**

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**coefficients, which in our model are the**

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**?b?s?. Coefficients are numeric values**

** **

**that indicate how much the quantity of**

** **

**the dependent variable will change as**

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**independent variables change. The data**

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**you compiled will be used to calculate**

** **

**the coefficient values. This information**

** **

**is important as it helps determine the**

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**quantity demanded of sugar-freechocolate changes in response to**

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**changes in the independent variables**

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**included in the model.**

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**ECO550_2_3_Maria-4:Okay, got it.**

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**You?ve used the terms ?dependent**

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**variable? and ?independent**

** **

**variable?while explaining the model.Could you provide me with some**

** **

**insight on these terms?**

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**ECO550_2_3_Herb-4:Yes, of course.**

** **

**A dependent variable is a variable that**

** **

**changes value when changes occur in**

** **

**some other variable. The term**

** **

**?variable? is used to capture the fact**

** **

**that the value can change. On the**

** **

**flipside, an independent variable is a**

** **

**variable that impacts or causes a change**

** **

**in the dependent variable.**

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**ECO550_2_3_Maria-5:Okay, Herb, I**

** **

**think I understand now. Can you give**

** **

**me examples of dependent and**

** **

**independent variables that are different**

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**from Katrina?s sugar-free-chocolate**

** **

**candy?**

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**ECO550_2_3_Herb-5:Yes I can,**

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**Maria. I believe a good example is**

** **

**umbrellas. Think about umbrella sales,**

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**when the weather changes from clear to**

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**rainy, people buy more umbrellas. This**

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**is especially prevalent with people who**

** **

**may have left their umbrellas at home.**

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**In this example, the quantity of**

** **

**umbrellaspurchased changes when the**

** **

**weather changes, so it is quite easy to**

** **

**identify the dependent and independent**

** **

**variables in this example. The**

** **

**quantity of umbrellas sold is the**

** **

**dependent variable while rain is the**

** **

**independent variable.**

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**ECO550_2_3_Maria-6:That?s**

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**anexcellent example, Herb. I understand**

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**exactly how the model functions now.**

** **

**The independent variables you and**

** **

**Renee selected will explain what caused**

** **

**or is causing the demand for Katrina?s**

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**sugar-free chocolate candy to change.**

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**ECO550_2_3_Herb-6: Yes, Maria,**

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**that?s right. Using the data you**

** **

**provided, we are going to see how well the model we formulated explains the**

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**demand for sugar-free-chocolate candy. Slide 4 Scene 4**

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**Herb?s office to go over the data Maria**

** **

**collected. ECO550_2_4_Herb-1: Maria, could**

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**you update me on the data you collected**

** **

**for this project?**

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**ECO550_2_4_Maria-1:I located most**

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**of the data you requested involving the**

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**number of sugar-free-chocolates**

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**Katrina?s sold since introducing the new**

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**candy and the selling prices. You will**

** **

**notice that this data is available in our**

** **

**accounting database. However, I had to**

** **

**search outside of the database for other**

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**data.**

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**ECO550_2_4_Herb-2: What other data**

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**did you need to acquire and how did**

** **

**you go about doing this search?**

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**ECO550_2_4_Maria-2:I needed to**

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**find the prices of coffee and I simply**

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**did a Google search and looked for**

** **

**reliable sources of information**

** **

**pertaining to concepts such as the price**

** **

**of coffee. Insert the URL for the Census Bureau Show a pictures of the Strayer Resource**

** **

**Center ECO550_2_4_Herb-3: Okay, that**

** **

**leaves data on the price of water,**

** **

**median income and the number of**

** **

**buyers. Where did you retrieve data for**

** **

**these independent variables?**

** **

**ECO550_2_4_Maria-3: Well, I**

** **

**retrieved median household income**

** **

**data from the U.S. Census Bureau**

** **

**website. Census data is easy to find,**

** **

**reliable and easy to use. I just went to**

** **

**the Census Bureau website, typed in the**

** **

**key term, ?household income,? then**

** **

**selected the median household income**

** **

**for the appropriate years. ECO550_2_4_Herb-4:Did you know**

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**you could have retrieved data on**

** **

**income and other variables by going**

** **

**through Strayer?s Global campus?**

** **

**Resources Center?**

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**ECO550_2_4_Maria-4: No, I didn?t**

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**know that, Herb. Isn?t access to**

** **

**Strayer?s Resources Center restricted?**

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**ECO550_2_4_Herb-5:Yes, only**

** **

**enrolled students, faculty and staff and**

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**subscribers can use the Resource**

** **

**Center. However, since there are so**

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**many Strayer educated employees here**

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**at Katrina?s, we have free access to the**

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**Resource Center.**

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**ECO550_2_4_Maria-5:That?s great**

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**news, Herb!**

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**ECO550_2_4_Herb-6: I agree! So in**

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**the future when you need to search for**

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**data, check out the Resource Center**

** **

**first.**

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**Slide 5 Scene 5**

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**Herb?s office to go over the data Maria**

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**collected and investigate briefly the**

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**Resource Center ECO550_2_5_Maria-1:The Resource**

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**Center seems very easy to use. I?ll**

** **

**definitely use it next time I need to find**

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**data. Let?s see where we are with the**

** **

**data I compiled. I told you about data**

** **

**for the quantity and price of Katrina?s**

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**sugar-free-chocolate candy, data on the**

** **

**price of caffeinated coffee and median**

** **

**household income. Now, I have to tell**

** **

**you, I had a problem finding price data**

** **

**for bottled water and finding the**

** **

**number of consumers who purchase**

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**chocolate candy.**

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**ECO550_2_5_Herb-1:Oh, no. Does**

** **

**this mean we have to change our**

** **

**model?**

** **

**ECO550_2_5_Maria-2:That depends**

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**upon whether you accept the proxy**

** **

**variables I found and recommend using them to ?estimate? the model.**

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**ECO550_2_5_Herb-2: I?m not quite**

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**sure about these ?proxy variables.?**

** **

**Could you elaborate on this concept?**

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**ECO550_2_5_Maria-3: Sure thing!**

** **

**When data is not available for a**

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**variable, analysts often use data from**

** **

**another variable to capture the same**

** **

**relationship as the original variable. It is**

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**this substitute variable that is referred to**

** **

**as ?proxy variable.?**

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**ECO550_2_5_Herb-3: Does data for**

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**proxy variables work as well when the**

** **

**model is estimated?**

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**ECO550_2_5_Maria-4:That depends,**

** **

**in some cases the answer is yes and in**

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**others it is no. In order to determine the**

** **

**answer, you are required to estimate the**

** **

**model to find out. Keep in mind that if**

** **

**the proxy data does not work, then the**

** **

**variable is dropped from the model. Slide 6 Scene 6**

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**Herb?s office to go over the data Maria**

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**collected. Show data table of per capita**

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**consumption of bottled water. ECO550_2_5_Herb-4: Thanks for the**

** **

**clarification on this subject. We can**

** **

**continue with our updates on the data**

** **

**you collected.**

** **

**ECO550_2_6_Maria-1:Again, since I**

** **

**was unable to locate the price of bottled**

** **

**water, I had to add a proxy variable.**

** **

**The data I used dealt with the per capita**

** **

**consumption of bottled water.**

** **

**ECO550_2_6_Herb-1:The data I?m**

** **

**looking at shows the per capita**

** **

**consumption of bottled water, by gallon**

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**over twelve years. I think this data**

** **

**works well as a proxy. What data did**

** **

**you find to proxy the number of**

** **

**buyers?**

** **

**ECO550_2_6_Maria-2: I had to think**

** **

**hard about a number of buyers proxy. In the end, I found a good proxy in a**

** **

**Department of Commerce report, it is**

** **

**called ?Current Industrial Reports.? The**

** **

**proxy I used dealt with the**

** **

**confectionery exports of domestic**

** **

**merchandise measured in pounds per**

** **

**year.**

** **

**ECO550_2_6_Herb-2:This data also**

** **

**serves as a great proxy. Of course, I?ll**

** **

**have to consult with Renee to get her**

** **

**opinion because she?s the one**

** **

**mentoring me on this project. But I?m**

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**fairly certain Renee will agree with me.**

** **

**ECO550_2_6_Maria-3:Okay! Here?s**

** **

**the data I compiled from our accounting**

** **

**records.**

** **

**ECO550_2_6_Herb-3: Great! Now,**

** **

**can we create the data set in Excel and**

** **

**then estimate the model?**

** **

**ECO550_2_6_Maria-4:That?s correct!**

** **

**I have some great resources that will**

** **

**help you review how to create datasets**

** **

**in Excel and how to use Excel functions**

** **

**to estimate the model. Please look over**

** **

**these resources and I will get back to**

** **

**you once you are finished.**

** **

**ECO550_2_6_Herb-4:Okay that**

** **

**sounds great! Slide 7 Scene 7**

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**Interaction Slide**

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**Incorporate iPad to show Videos about**

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**Excel and model creation Slide 8 Multiple Linear regression**

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**analysis using Microsoft**

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**Excel?s Data Analysis**

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**toolhttp://www.youtube.com/wa**

** **

**tch?v=ZwtxHXh-ZXU**

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**Multiple Regression**

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**Interpretation in Excel**

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**http://www.youtube.com/watch?**

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**v=tlbdkgYz7FM Scene 8**

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**Herb?s office to go over the data Maria**

** **

**collected Show regression output table ECO550_2_8_Maria-1: I hope those**

** **

**videos helped you gain a better**

** **

**understanding of using Excel to create**

** **

**data sets. I want you to keep in mind**

** **

**that the procedure we will be using to**

** **

**estimate the model is regression. The**

** **

**model Renee and you formulated is a**

** **

**multiple regression model because there**

** **

**is more than the price of chocolate**

** **

**included as an independent variable.**

** **

**Take a look at the regression output for**

** **

**our estimated model.**

** **

**ECO550_2_8_Herb-1: Wow! That was**

** **

**fast!**

** **

**ECO550_2_8_Maria-2:Yes, Herb,**

** **

**Excel generates results almost**

** **

**instantaneously. Herb shows formula ECO550_2_8_Herb-2: Okay, let?s see**

** **

**what we have. I see the coefficients are**

** **

**presented in a single column. Let me**

** **

**rewrite the model to include the**

** **

**coefficient values.**

** **

**ECO550_2_8_Maria-3: What does all of this mean?**

** **

**ECO550_2_8_Herb-3: Well, the first**

** **

**number, three hundred and forty four**

** **

**thousand and four hundred point five**

** **

**refers to the number of boxes of sugarfree-chocolate demanded if none of the**

** **

**independent variables changed their**

** **

**value. If we assume one of the other**

** **

**variables changes while all of the others**

** **

**remain constant, then we calculate a**

** **

**new number of boxes of chocolate.**

** **

**ECO550_2_8_Maria-4: Could you**

** **

**give me an example for this change? Herb shows Maria the updated formula One more formula for Herb to go over Display on projector: The new quantity**

** **

**demanded is, three hundred seventyfour thousand, three hundred sixty-six**

** **

**point two boxes of sugar-freechocolates. ECO550_2_8_Herb-4: Sure! For my**

** **

**example, let?s assume that the price of**

** **

**Katrina?s sugar-free-chocolates declines**

** **

**by one dollar while none of the other**

** **

**independent variables changes.**

** **

**According to our model, the decrease in**

** **

**price would cause quantity demanded to**

** **

**increase by twenty nine thousand and**

** **

**nine hundred and sixty five point seven**

** **

**boxes. Each of the other coefficients is**

** **

**then interpreted similarly. Here?s the**

** **

**way we calculate the change in quantity**

** **

**demanded, if price was to change.For**

** **

**all of the variables that are constant,**

** **

**that is, those unchanging variables, we**

** **

**substitute a ?zero.?**

** **

**ECO550_2_8_Maria-5: That is very**

** **

**interesting! Is there anything else I**

** **

**should know?**

** **

**ECO550_2_8_Herb-5: There is one**

** **

**more thing I?d like to add. For the price**

** **

**of Katrina?s sugar-free-chocolate,**

** **

**substitute one dollar, with a negative**

** **

**sign in front of it to indicate price**

** **

**declined. Here, I?ll show you how the**

** **

**model determines quantity demanded.**

** **

**After making the changes the new**

** **

**quantity demanded is, three hundred seventy-four thousand, three hundred**

** **

**sixty-six point two boxes of sugar-freechocolates.**

** **

**ECO550_2_8_Maria-6:Thank you for**

** **

**sharing that with me! Now that you**

** **

**explained this all to me, things are**

** **

**much clearer.**

** **

**ECO550_2_8_Herb-6: Not a problem**

** **

**at all. As you can see, regression**

** **

**models are useful but only if the results**

** **

**from the model are valid.**

** **

**Slide 9 Scene 9**

** **

**Herb?s office to conduct significance**

** **

**test on the model and coefficients with**

** **

**Maria Display on projector: The coefficient of**

** **

**determination ranges from 0 to 1.**

** **

**Display on projector: A higher adjusted Rsquare indicates a better model. http://wn.com/rsquared_or_coefficient_of_determinatio**

** **

**n ECO550_2_9_Herb-1: Now we need**

** **

**to check the model and coefficients for**

** **

**significance.**

** **

**ECO550_2_9_Maria-1:How do we**

** **

**that?**

** **

**ECO550_2_9_Herb-2: First, we**

** **

**evaluate the adjusted R-square value to**

** **

**see how much of the variation in the**

** **

**quantity demanded of sugar-freechocolates is explained by the**

** **

**independent variables we included in**

** **

**the model. The closer R-square is to**

** **

**one, the better is the explanatory power**

** **

**of the independent variables.The**

** **

**adjusted R-square for our model?s**

** **

**results is point seven, nine, nine which**

** **

**means the model explains seventy-nine**

** **

**point nine percent of the variation in the**

** **

**quantity of sugar-free-chocolates.**

** **

**Maria, I found this video that helps to**

** **

**explain the coefficient of determination**

** **

**from another standpoint.**

** **

**ECO550_2_9_Maria-2:Based upon the**

** **

**explanation you gave about R-square**

** **

**being close to one, seventy-nine-pointnine percent is very good.**

** **

**ECO550_2_9_Herb-3:Yes, it looks as**

** **

**if we included the right set of independent variables.**

** **

**ECO550_2_9_Maria-3:What?s next,**

** **

**Herb?**

** **

**ECO550_2_9_Herb-4:Now we**

** **

**evaluate the overall significance of the**

** **

**independent variable. We are looking**

** **

**for the answer to the question: Can the**

** **

**behavior of the dependent variable, our**

** **

**quantity of sugar-free-chocolates, be**

** **

**explained without relying on the**

** **

**independent variables included in the**

** **

**model? For this test we will evaluate**

** **

**the F-statistic. We first need to state the**

** **

**level of significance, called the**

** **

**?critical-value,? which we will use to**

** **

**test the F-statistic.**

** **

**For our model we are going to use the**

** **

**five-percent level of significance;**

** **

**therefore,the table gives us a critical Fvalue of four-point-one-two.**

** **

**ECO550_2_9_Maria-4:I think I**

** **

**understand how you selected the critical**

** **

**value. I think now we must compare the**

** **

**F-statistic generated for the model to**

** **

**the critical value.**

** **

**ECO550_2_9_Herb-5:Yes, that?s**

** **

**exactly what we will do. Since the Fcalculated value is eleven-point-ninefive-two and is greater than four-pointone-two, a significant relationship does**

** **

**exist between the quantity of sugar-freechocolate and the four independent**

** **

**variables.**

** **

**ECO550_2_9_Maria-5:Great! So**

** **

**we?re done then?**

** **

**ECO550_2_9_Herb-6:No, not quite**

** **

**yet. We still need to evaluate the**

** **

**significance of each coefficient. We can**

** **

**actually use the same method used to**

** **

**find the critical value of F only this time we will conduct a t-test on each**

** **

**coefficient value.**

** **

**Slide 10 Scene 10**

** **

**Herb?s office to conduct significance**

** **

**test on the model and coefficients with**

** **

**Maria ECO550_2_10_Maria-1:So based on**

** **

**the t-test, tell me which independent**

** **

**variables are significant.**

** **

**ECO550_2_10_Herb-1: According to**

** **

**the t-test, only the price per boxand**

** **

**bottled water are significant. The**

** **

**coefficient on median income is**

** **

**marginally significant; however, we**

** **

**cannot use the coefficient for anything.**

** **

**Surprisingly, the caffeinated coffee**

** **

**coefficient is insignificant.**

** **

**ECO550_2_10_Maria-2:I see why you**

** **

**are saying coefficients are insignificant.**

** **

**ECO550_2_10_Herb-2: Yes, this**

** **

**revelation about independent variable**

** **

**significance means we need to drop the**

** **

**caffeinated coffee variable and reestimate the model.**

** **

**ECO550_2_10_Maria-3:Is it okay to**

** **

**drop variables from a model after the**

** **

**model is estimated?**

** **

**ECO550_2_10_Herb-3: Yes, if an**

** **

**independent variable is not significant,**

** **

**one of the recommended solutions is to**

** **

**drop the variable from the model. In**

** **

**our model, this means sugar-freechocolate and caffeinated coffee are not**

** **

**substitute goods so coffee does not**

** **

**contribute anything to our**

** **

**understanding about demand for**

** **

**Katrina?s sugar-free-coffee.**

** **

**ECO550_2_10_Maria-4:Does**

** **

**dropping the insignificant variable**

** **

**mean we still use the coefficients**

** **

**generated when caffeinated coffee was**

** **

**a variable in the model? ECO550_2_10_Herb-4: That is a good**

** **

**question, Maria! The answer is, no.**

** **

**When we drop a variable like**

** **

**caffeinated coffee from the model, we**

** **

**have to re-estimate the model and then**

** **

**run the Excel regression procedure**

** **

**again to generate new coefficient**

** **

**values.**

** **

**ECO550_2_10_Maria-5:Let?s run the**

** **

**regression without data on caffeinated**

** **

**coffee?I?m anxious to see if there is**

** **

**any difference in the results.**

** **

**ECO550_2_10_Herb-5: Okay, but**

** **

**before we re-estimate the model, I think**

** **

**we should also drop the bottled water**

** **

**variable. After some consideration, the**

** **

**amount of water consumed is not a**

** **

**good proxy for the price of water. Also,**

** **

**the correlation coefficient between**

** **

**bottles of water and income is nearly**

** **

**one. Therefore, there seems to be a**

** **

**problem with their correlation. Keep in**

** **

**mind that we also need to add a Dummy**

** **

**variable to measure the impact of sugarfree-chocolate which Katrina?s**

** **

**introduced into the market last year.**

** **

**Renee and I forgot to include a dummy**

** **

**variable in the first model.**

** **

**ECO550_2_10_Maria-6: Whatever**

** **

**you say, Herb. You know this process**

** **

**better than I do.**

** **

**ECO550_2_10_Herb-6:Let me**

** **

**compute this quick. (pause) Here are the**

** **

**results now. Scene 11 Scene 11**

** **

**Herb?s office to conduct significance**

** **

**test on the model and coefficients with**

** **

**Maria ECO550_2_11_Maria-1:Are these**

** **

**results better, Herb?**

** **

**ECO550_2_11_Herb-1:Yes, everything**

** **

**is now significant. Now we can use the**

** **

**regression equation to derive decisionmaking statistics like elasticity**

** **

**coefficients.**

** **

**ECO550_2_11_Maria-2:How do we**

** **

**go about doing that?**

** **

**ECO550_2_11_Herb-2: Make a note**

** **

**that the point elasticity of demand is**

** **

**calculated as the change in quantity**

** **

**divided by the change in price times**

** **

**price divided by quantity. Here?s how**

** **

**the formula looks.**

** **

**ECO550_2_11_Maria-3:Okay, so**

** **

**where is the data to calculate elasticity?**

** **

**ECO550_2_11_Herb-3:The regression**

** **

**coefficients or the b?s in the model are**

** **

**the change in quantity divided by a**

** **

**change in price, so that part is simple.**

** **

**ECO550_2_11_Maria-4:Do you mean**

** **

**the negative forty-two thousand, one**

** **

**hundred eighty-nine that is the**

** **

**coefficient for the price variable?**

** **

**ECO550_2_11_Herb-4:Yes, however,**

** **

**we have to calculate the ?q? that?s in**

** **

**the elasticity of demand formula.**

** **

**ECO550_2_11_Maria-5:What does the**

** **

**?q? stand for?**

** **

**ECO550_2_11_Herb-5: In the**

** **

**elasticity formula, q, is the quantity**

** **

**demanded at a specific price. For this**

** **

**step, we first find the demand curve.**

** **

**ECO550_2_11_Maria-6:I thought we**

** **

**already have the demand curve. ECO550_2_11_Herb-6: Not quite yet,**

** **

**I was discussing the regression**

** **

**equation which includes all of the**

** **

**independent variables we included in**

** **

**the model. The demand curve is**

** **

**different, as only the price variable is**

** **

**included in the demand curve.For our**

** **

**example we will use some numbers**

** **

**from 2004. We will then use these**

** **

**numbers to showcase how to derive the**

** **

**demand curve. First, go back to the**

** **

**regression equation. Now substitute the**

** **

**data as follows. For income, substitute**

** **

**one-thousand dollars and for exports**

** **

**substitute two-six-three-three-six-six**

** **

**point seven.**

** **

**Slide 12 Scene 12**

** **

**Herb?s office to conduct significance**

** **

**test on the model and coefficients with**

** **

**Maria ECO550_2_12_Maria-1:Okay, I did**

** **

**that. What about the price variable,**

** **

**should I substitute for price?**

** **

**ECO550_2_12_Herb-1:No, not yet.**

** **

**Just solve what you have as this will**

** **

**give the demand curve.**

** **

**ECO550_2_12_Maria-2:Is that all**

** **

**there is to finding the demand curve**

** **

**from the regression model?**

** **

**ECO550_2_12_Herb-2: Yes, that?s it!**

** **

**We?re nearly finished as we have only**

** **

**two more steps to calculate elasticity.**

** **

**Again using the data from 2004**

** **

**substitute twenty-four dollars for price**

** **

**variable into thedemand curve and solve**

** **

**to get a quantity equal to two-million,**

** **

**ninety-six thousand, seven-hundred**

** **

**eight-point eight-eight. The elasticity**

** **

**coefficient is then negative zero point**

** **

**four-eight-two-nine. We can then round**

** **

**to negative zero point four-eight-three.**

** **

**ECO550_2_12_Maria-3:Thank you for**

** **

**going over this with me. Since you**

** **

**showed me how to do this, things seem**

** **

**clearer. Does this mean we are finished with this stage of the process to create**

** **

**information for Ken to use when he**

** **

**considers the decision to expand into**

** **

**international markets?**

** **

**ECO550_2_12_Herb-3: Yes, we have**

** **

**completed this stage. We just need to**

** **

**update Renee on our progress.**

** **

**ECO550_2_12_Maria-4: I will update**

** **

**Renee on our findings. While I**

** **

**complete this task could you complete**

** **

**this review activity based on what we**

** **

**just discussed?**

** **

**Slide 13 Scene 13**

** **

**Check Your Understanding**

** **

**Scenario-based and will use folder**

** **

**structure to present scenario, then have**

** **

**tabs to represent options for answers**

** **

**Narrations will be provided for scenario**

** **

**overview and choices (feedback**

** **

**included as well) ECO550_2_13_Maria-1: Based upon**

** **

**the result that the price elasticity of**

** **

**demand coefficient is -0.483 for**

** **

**Katrina?s sugar-free-chocolate, Herb**

** **

**can advise Ken that Katrina?s should**

** **

**never use price as a tool for increasing**

** **

**total revenue?**

** **

**ECO550_2_13_Maria, Agree,**

** **

**Response 1-2:Agreed, that?s correct**

** **

**since price elasticity of demand is less**

** **

**than one it means demand is elastic. As**

** **

**a result of this, the increasing price**

** **

**would lower total revenue because**

** **

**customers would react very strongly to**

** **

**an increase in price by changing their**

** **

**purchases by a greater percentage than**

** **

**the percentage change in price.**

** **

**Therefore, Herb is giving Ken the**

** **

**appropriate advice.**

** **

**ECO550_2_13_Maria Incorrect**

** **

**response-3:**

** **

**We should expect the percentage**

** **

**change in quantity demanded to**

** **

**change by less than the percentage**

** **

**change in price.**

** **

**ECO550_2_13_Maria, Disagree,**

** **

**Option 2-4: When the absolute value of the price elasticity of demand**

** **

**coefficient is less than one it means**

** **

**demand is inelastic, so if price is**

** **

**increased by a certain percentage, say**

** **

**ten percent, demand will change by a**

** **

**lower percentage, such as eight percent.**

** **

**Therefore, when demand is price**

** **

**inelastic, increasing the price actually**

** **

**results in higher total revenue. For**

** **

**Katrina?s, this means demand for sugarfree-chocolate is price inelastic and the**

** **

**company could increase total revenue**

** **

**by increasing price.**

** **

**Slide 14 Summary**

** **

**Concluding scene taking place in**

** **

**conference room ECO550_2_14_Herb-1: Maria, we**

** **

**have discussed and analyzed a lot today.**

** **

**ECO550_2_14_Maria-1: We sure**

** **

**have. Let?s outline the tasks we**

** **

**completed to make certain we**

** **

**remember everything. First, you**

** **

**explained the demand model that you**

** **

**and Renee formulated. I then described**

** **

**the data and its sources for the data that**

** **

**I compiled. We later discussed proxy**

** **

**data and agreed it was okay to use this**

** **

**kind of data for two of the variables.**

** **

**ECO550_2_14_Herb-2: Let?s not**

** **

**forget about our creation of the data set**

** **

**in Excel along with the creation of our**

** **

**estimation model.**

** **

**ECO550_2_14_Maria-2: I?m glad you**

** **

**brought that up! Next, we discussed the**

** **

**results of...**

** **

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This question was answered on: * Sep 13, 2020 *

* * Solution~00021147620865.docx (25.37 KB)

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#### About this Question

STATUSAnswered

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DATE ANSWEREDSep 13, 2020

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