Chapter 7: EMPIRICAL DEMAND FUNCTIONS...Chapter 7: DEMAND ESTIMATION AND FORECASTING © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor

Chapter 7: DEMAND ESTIMATION AND FORECASTING © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in

any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 7: DEMAND ESTIMATION AND FORECASTING

Multiple Choice

7-1 Demand equations derived from actual market data are

a. empirical demand functions.

b. never estimated using consumer interviews.

c. generally estimated using regression analysis.

d. both a and c

e. all of the above

Answer: d

Difficulty: 02 Medium

Topic: Direct Methods of Demand Estimation

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 07-01

7-2 A representative sample

a. eliminates the problem of response bias.

b. reflects the characteristics of the population.

c. is frequently a random sample.

d. both b and c

e. all of the above

Answer: d

Difficulty: 01 Easy



Blooms: Understand


7-3 One problem with consumer interviews is that

a. the sample may not be a representative sample.

b. response bias.

c. interviews allow for rapid turnaround.

d. both a and b

e. all of the above

Answer: d

Difficulty: 01 Easy



Blooms: Understand


7-4 The estimated demand for a good is

Q = 25- 5P + 0.32M +12P

R

where Q is the quantity demanded of the good, P is the price of the good, M is income, and P

R is

the price of related good R. The coefficient on P



a. does not have the expected sign.

b. is negative as expected.

c. should have the same sign as the coefficient on P

R.

d. should not be greater than one (in absolute value).

e. both b and d

Answer: b


Topic: Specification of the Empirical Demand Function

AACSB: Analytic

Blooms: Apply



Q = 25- 5P + 0.32M +12P

R


R is

the price of related good R. The good is

a. an inferior good since the coefficient on P

Ris positive.

b. a normal good since the coefficient on P

R is positive.

c. an inferior good since the coefficient on M is greater than one.

d. a normal good since the coefficient on M is positive.

e. none of the above

Answer: d



AACSB: Analytic

Blooms: Apply



Q = 25- 5P + 0.32M +12P

R


R is

the price of related good R. This good and the related good R are

Answer: d



AACSB: Analytic

Blooms: Apply


a. complements since the coefficient on M is positive.

b. substitutes since the coefficient on M is positive.

c. complements since the coefficient on P

R is positive.

d. substitutes since the coefficient on P

R is positive.


Q = 25- 5P + 0.32M +12P

R




R is

the price of related good R. If income decreases by $1,000, all else constant, quantity demanded

will ________ by _________ units.

a. decrease; 320 units

b. increase; 3.2 units

c. decrease; 1200 units

d. increase; 500 units

e. decrease; 500 units

Answer: a



AACSB: Analytic

Blooms: Apply



Q = 25- 5P + 0.32M +12P

R


R is

the price of related good R. If the price of the good falls by $4, the quantity demanded will

________ by ________ units.

a. increase; 5 units

b. increase; 20 units

c. increase; 50 units

d. increase; 48 units

e. decrease; 12 units

Answer: b



AACSB: Analytic

Blooms: Apply



Q = 4,800 -16P - 0.65M -1.5P

R


R is

the price of related good R. The coefficient on P

a. violates the law of demand.

b. is negative as dictated by the law of demand.

c. should not be greater than one (in absolute value).

d. should have the same sign as the coefficient on P

R.

e. both c and d

Answer: b

Difficulty: 01 Easy



Blooms: Understand





Q = 4,800 -16P - 0.65M -1.5P

R


R is

the price of related good R. The good is

a. an inferior good since the coefficient on P

R is negative.

b. a normal good since the coefficient on P

R is negative.

c. a normal good since the coefficient on M is greater than one (in absolute value).

d. an inferior good since the coefficient on M is negative.


Answer: d




Blooms: Understand



Q = 4,800 -16P - 0.65M -1.5P

R


R is

the price of related good R. This good and good R are

a. complements since the coefficient on M is negative.

b. substitutes since the coefficient on M is negative.

c. complements since the coefficient on P

R is negative.

d. substitutes since the coefficient on P

R is negative.


Answer: c




Blooms: Understand



Q = 4,800 -16P - 0.65M -1.5P

R


R is

the price of related good R. If income decreases by $2,000, all else constant, quantity demanded

will ________ by _________ units. a. increase; 1.30 units b. decrease; 6.5 units c. increase; 1,300 units d. decrease; 65 units

Answer: c



AACSB: Analytic

Blooms: Apply





Q = 4,800 -16P - 0.65M -1.5P

R


R is

the price of related good R. If the price of the good rises by $10, all else constant, the quantity

demanded will ________ by ________ units. a. increase; 16 units b. decrease; 160 units c. decrease; 1.5 units d. increase; 150 units

Answer: b

Difficulty: 01 Easy


AACSB: Analytic

Blooms: Apply

Learning Objective: 07-02 7-14 If demand is estimated using the empirical specification

lnQ = ln a + bln P + c ln M + d ln P

R, then

an equivalent expression for demand is a.

lnQ = a + bP + cM + dP

R.

b. Q = a + bP + cM + dP

R.

c. Q = ea + bP + cM + dP

R.

d. Q = abPcMdP

R.


Answer: e

Difficulty: 03 Hard



Blooms: Understand

Learning Objective: 07-02 7-15 Possible problems with consumer interviews include:

a. a non-random sample b. the identification problem c. response bias d. both a and b e. both a and c

Answer: e




Blooms: Understand


7-16 For a linear demand function, Q = a + bP + cM + dP

R, the income elasticity is

a. c. b. c(M/Q). c. c(Q/M). d. −c. e. −c(Q/

P

R).

Answer: b






Blooms: Understand

Learning Objective: 07-02 7-17 For a nonlinear demand function of the form ,

Q = aPb M c P

R

d , the estimated cross-price elasticity of demand is a. d. b. −d. c. d(

P

R/P).

d. −d(P/ P

R).

e. d(Q/ P

R).

Answer: a




Blooms: Understand

Learning Objective: 07-02 7-18 Build-Right Concrete Products produces specialty cement used in construction of highways.

Build-Right is a price-setting firm and estimates the demand for its cement by the State Highway Department using a demand function in the nonlinear form:

Q = aPb M c P

R

d

where Q = yards of cement demanded monthly, P = the price of Build-Right’s cement per yard, M = state tax revenues per capita, and

P

R = the price of asphalt per yard. The manager at Build-

Right transforms the nonlinear relation into a linear relation for estimation. The estimation results are presented below:

DEPENDENT VARIABLE: LNQ R-SQUARE F-RATIO P-VALUE ON F

OBSERVATIONS: 34 0.678 14.323 0.02311

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T-RATIO

P-VALUE

INTERCEPT 4.00 1.50 2.67 0.0122

LNP –0.800 0.25 –3.20 0.0032

LNM 0.750828 0.1816 4.13 0.0003

LNPR 0.600 0.200 3.00 0.0054

Given the above, the estimated demand for cement is a. elastic because E = −4.0. b. elastic because E = −2.0. c. elastic because E = −1.5. d. inelastic because E = −0.32. e. inelastic because E = −0.8.

Answer: e



AACSB: Analytic

Blooms: Apply




7-19 Build-Right Concrete Products produces specialty cement used in construction of highways.


Q = aPb M c P

R

d


P




OBSERVATIONS: 34 0.678 14.323 0.02311

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T-RATIO

P-VALUE

INTERCEPT 4.00 1.50 2.67 0.0122

LNP –0.800 0.25 –3.20 0.0032

LNM 0.750828 0.1816 4.13 0.0003

LNPR 0.600 0.200 3.00 0.0054

Given the above, at the 1 percent level of significance, the number of degrees of freedom for a t−test is _____, and the critical value of the t−statistic is ________. 0Only parameter estimate(s) ________ is (are) NOT statistically significant at the 1 percent level of significance. a. 30; 2.457; a b. 30; 2.750; a c. 34; 2.042; c d. 34; 2.042, a and c

Answer: b

Difficulty: 03 Hard



Blooms: Understand




7-20 Build-Right Concrete Products produces specialty cement used in construction of highways. Build-Right is a price-setting firm and estimates the demand for its cement by the State Highway Department using a demand function in the nonlinear form:

Q = aPb M c P

R

d


P




OBSERVATIONS: 34 0.678 14.323 0.02311

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T-RATIO

P-VALUE

INTERCEPT 4.00 1.50 2.67 0.0122

LNP –0.800 0.25 –3.20 0.0032

LNM 0.750828 0.1816 4.13 0.0003

LNPR 0.600 0.200 3.00 0.0054

Given the above, if tax revenue per capita (M) increases 5%, the estimated quantity of cement demanded will a. increase by less than 1%. b. increase more than 1% but less than 5%. c. increase more than 5% but less than 10%. d. increase more than 10%.

Answer: b




Blooms: Understand




7-21 Build-Right Concrete Products produces specialty cement used in construction of highways. Build-Right is a price-setting firm and estimates the demand for its cement by the State Highway Department using a demand function in the nonlinear form:

Q = aPb M c P

R

d


P




OBSERVATIONS: 34 0.678 14.323 0.02311

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T-RATIO

P-VALUE

INTERCEPT 4.00 1.50 2.67 0.0122

LNP –0.800 0.25 –3.20 0.0032

LNM 0.750828 0.1816 4.13 0.0003

LNPR 0.600 0.200 3.00 0.0054

Given the above, the estimated cross-price elasticity of demand for cement relative to the price of asphalt is a. 0.3 b. 0.6 c. 1.2 d. 3.0 e. none of the above

Answer: b




Blooms: Understand



Q = aPb M c P

R

d


P






OBSERVATIONS: 34 0.678 14.323 0.02311

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T-RATIO

P-VALUE

INTERCEPT 4.00 1.50 2.67 0.0122

LNP –0.800 0.25 –3.20 0.0032

LNM 0.750828 0.1816 4.13 0.0003

LNPR 0.600 0.200 3.00 0.0054

Given the above, if the price of asphalt (

P

R) decreases 20%, the estimated quantity of cement

demanded will: a. increase 12% b. increase 6% c. increase 1.2% d. decrease 12%. e. decrease 1.2%.

Answer: d




Blooms: Understand



Q = aPb M c P

R

d


P




OBSERVATIONS: 34 0.678 14.323 0.02311

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T-RATIO

P-VALUE

INTERCEPT 4.00 1.50 2.67 0.0122

LNP –0.800 0.25 –3.20 0.0032

LNM 0.750828 0.1816 4.13 0.0003

LNPR 0.600 0.200 3.00 0.0054

Given the above, if Build-Right decides to charge the State Highway Department $55 per yard for its cement when tax revenues per capita are $3,200 and the price of asphalt is $35 per yard, the expected quantity demanded is a. 1,000 yards of cement. b. 2,000 yards of cement. c. 4,000 yards of cement.



d. 6,000 yards of cement. e. 8,000 yards of cement.

Answer: e




Blooms: Understand

Learning Objective: 07-02 7-24 The estimated demand for a good X is

Q = 70 - 3.5P - 0.6M + 4P

Z, where

Q = units of the good,

P = price of the good, M = income, and P

Z = price of related good Z. All parameter estimates are

statistically significant. Which of the following statements is correct? a. X is a normal good. b. X is an inferior good. c. X and Z are substitutes. d. X and Z are complements. e. both b and c

Answer: e




Blooms: Understand


7-25 The following linear demand specification is estimated for Conlan Enterprises, a price-setting firm:

Q = a + bP + cM + dP

R

where Q is the quantity demanded of the product Conlan Enterprises sells, P is the price of that product, M is income, and

P

Ris the price of a related product. The results of the estimation are

presented below:

DEPENDENT VARIABLE: Q R-SQUARE F-RATIO P-VALUE ON F

OBSERVATIONS: 32 0.7984 36.14 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T-RATIO

P-VALUE

INTERCEPT 846.30 76.70 11.03 0.0001

P –8.60 2.60 –3.31 0.0026

M 0.0184 0.0048 3.83 0.0007

PR –4.3075 1.230 –3.50 0.0016

Given the above, at the 1% level of significance, the critical value of the t−statistic used by Conlan to test for statistical significance has _____ degrees of freedom and is equal to ________. a. 32; 0.7984 b. 32; 36.14 c. 32; 4.57 d. 30; 2.750 e. 28; 2.763

Answer: e

Difficulty: 01 Easy





Blooms: Understand

Learning Objective: 07-02 7-27 The following linear demand specification is estimated for Conlan Enterprises, a price-setting

firm:


R


P


presented below:


OBSERVATIONS: 32 0.7984 36.14 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T-RATIO

P-VALUE

INTERCEPT 846.30 76.70 11.03 0.0001

P –8.60 2.60 –3.31 0.0026

M 0.0184 0.0048 3.83 0.0007

PR –4.3075 1.230 –3.50 0.0016

Given the above, at the 1% level of significance, which estimates are statistically significant? a. All are statistically significant b. All but a are statistically significant c. Only

a, b,and care statistically significant

d. Only a is statistically significant e. All but

b and d are statistically significant

Answer: a

Difficulty: 01 Easy



Blooms: Understand


7-28 The following linear demand specification is estimated for Conlan Enterprises, a price-setting firm:


R


P


presented below:




OBSERVATIONS: 32 0.7984 36.14 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T-RATIO

P-VALUE

INTERCEPT 846.30 76.70 11.03 0.0001

P –8.60 2.60 –3.31 0.0026

M 0.0184 0.0048 3.83 0.0007

PR –4.3075 1.230 –3.50 0.0016

Given the above, based upon the parameter estimates in the above table a. this good is a normal good. b. the related good is a substitute. c. the related good is a complement. d. a and b e. a and c

Answer: e



AACSB: Analytic

Blooms: Apply


firm:


R


P


presented below:


OBSERVATIONS: 32 0.7984 36.14 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T-RATIO

P-VALUE

INTERCEPT 846.30 76.70 11.03 0.0001

P –8.60 2.60 –3.31 0.0026

M 0.0184 0.0048 3.83 0.0007

PR –4.3075 1.230 –3.50 0.0016

Assume that the income is $10,000, the price of the related good is $40, and Conlan chooses to set the price of this product at $30. At the prices and income given above, Conlan can expect to sell _________units. a. 342 b. 600 c. 724 d. 864 e. 872

Answer: b

Difficulty: 01 Easy





Blooms: Understand


firm:


R


P


presented below:


OBSERVATIONS: 32 0.7984 36.14 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T-RATIO

P-VALUE

INTERCEPT 846.30 76.70 11.03 0.0001

P –8.60 2.60 –3.31 0.0026

M 0.0184 0.0048 3.83 0.0007

PR –4.3075 1.230 –3.50 0.0016

Assume that the income is $10,000, the price of the related good is $40, and Conlan chooses to set the price of this product at $30. At the prices and income given above, what is the price elasticity of demand? a. −0.43 b. −0.86 c. −1.00 d. −1.43 e. −2.40

Answer: a



AACSB: Analytic

Blooms: Apply


firm:


R


P


presented below:




OBSERVATIONS: 32 0.7984 36.14 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T-RATIO

P-VALUE

INTERCEPT 846.30 76.70 11.03 0.0001

P –8.60 2.60 –3.31 0.0026

M 0.0184 0.0048 3.83 0.0007

PR –4.3075 1.230 –3.50 0.0016

Assume that the income is $10,000, the price of the related good is $40, and Conlan chooses to set the price of this product at $30. At the prices and income given above, what is the income elasticity? a. −1.62 b. −0.87 c. 0.21 d. 0.31 e. 1.50

Answer: d



AACSB: Analytic

Blooms: Apply


firm:


R


P


presented below:


OBSERVATIONS: 32 0.7984 36.14 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T-RATIO

P-VALUE

INTERCEPT 846.30 76.70 11.03 0.0001

P –8.60 2.60 –3.31 0.0026

M 0.0184 0.0048 3.83 0.0007

PR –4.3075 1.230 –3.50 0.0016

For the next 2 questions suppose income remains at $10,000 but the price of the related good increases to $60 and Conlan decides to raise the price of its product to $50. At the prices and income given above, Conlan can expect to sell _________units. a. 342 b. 600 c. 724 d. 864 e. 872



Answer: a



AACSB: Analytic

Blooms: Apply


firm:


R


P


presented below:


OBSERVATIONS: 32 0.7984 36.14 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T-RATIO

P-VALUE

INTERCEPT 846.30 76.70 11.03 0.0001

P –8.60 2.60 –3.31 0.0026

M 0.0184 0.0048 3.83 0.0007

PR –4.3075 1.230 –3.50 0.0016

For the next 2 questions suppose income remains at $10,000 but the price of the related good increases to $60 and Conlan decides to raise the price of its product to $50.What is the new own price elasticity of demand? a. −0.24 b. −0.43 c. −0.87 d. −1.00 e. −1.26

Answer: e

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply

Learning Objective: 07-02 7-34 A market-determined price

a. is determined by the manager of a firm. b. is determined by the intersection of demand and supply curves. c. is an endogenous variable d. both a and b e. both b and c

Answer: e

Difficulty: 01 Easy

Topic: Estimating Demand for a Price-Setting Firm


Blooms: Understand



Learning Objective: 07-03 7-35 Manager-determined prices are

a. not determined by the forces of demand and supply. b. exogenous variables in a demand equations. c. associated with price-taking firms. d. both a and b e. both b and c

Answer: d

Difficulty: 01 Easy

Topic: Estimating Demand for a Price-Setting Firm


Blooms: Understand


7-36 Qualitative forecasting methods

a. use higher quality data than statistical methods.

b. are often the result of expert opinion.

c. cannot be replicated by another researcher.

d. both b and c

e. all of the above

Answer: d

Difficulty: 01 Easy



Blooms: Remember


7-37 Time-series models

a. cannot be replicated by another researcher.

b. use dummy variables to control for cyclical variation.

c. use dummy variables to control for time trend.

d. both a and b

e. both b and c

Answer: b

Difficulty: 01 Easy

Topic: Seasonal (or Cyclical) Variation


Blooms: Remember


7-38 Time-series data

a. show the behavior of a particular variable over time.

b. may exhibit trend or cyclical variation, but not both at the same time.

c. may exhibit trend and cyclical variation at the same time.

d. both a and b

e. both a and c

Answer: e

Difficulty: 01 Easy



Blooms: Understand




7-39 Seasonal or cyclical variation in a time series model

a. is regular in nature and can be accounted for by dummy variables.

b. can decrease the accuracy of a forecast if not accounted for by dummy variables.

c. exhibits irregular variation that can be accounted for by dummy variables.

d. both a and b

e. both b and c

Answer: d




Blooms: Understand


7-40 Dummy variables are used in time-series forecasting models

a. to change the intercept of a regression in selected periods.

b. to account for random variation in the data.

c. to account for seasonal variation in the data.

d. both a and b

e. both a and c

Answer: e

Difficulty: 01 Easy



Blooms: Understand


7-41 A consulting firm estimates the following quarterly sales forecasting model:

Q

t= a + bt + cD

The equation is estimated using quarterly data from 2005I–2015III (t = 1,..., 43). The variable D

is a dummy variable for the second quarter where:

D = 1 in the second quarter, and 0 otherwise.

The results of the estimation are:

DEPENDENT VARIABLE: QT R−SQUARE F−RATIO P−VALUE ON F

OBSERVATIONS: 43 0.8644 127.5 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 22.5 9.32 2.41 0.0201

T 1.86 0.55 3.38 0.0016

D 2.0 0.71 2.82 0.0075



Give the above, at the 1 percent level of significance, is there a statistically significant trend in

sales?

a. No, since 1.86 < 2.704

b. No, since 0.55 < 1.86

c. No, since 1.02 < 2.704

d. Yes, since 1.86 > 0.55

e. Yes, since 3.38 > 2.704

Answer: e


Topic: Time-Series Forecasts of Sales and Price

AACSB: Analytic

Blooms: Apply



Q

t= a + bt + cD






OBSERVATIONS: 43 0.8644 127.5 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 22.5 9.32 2.41 0.0201

T 1.86 0.55 3.38 0.0016

D 2.0 0.71 2.82 0.0075

Given the above, at the 1 percent level of significance, is there a statistically significant trend in

sales?

a. Yes, because 0.0016 < 0.01.

b. No, because 0.0016 < 0.01.

c. Yes, because 0.55 > 0.01.

d. Yes, because 1.86 > 0.01.

e. both c and d

Answer: a



AACSB: Analytic

Blooms: Apply





Q

t= a + bt + cD






OBSERVATIONS: 43 0.8644 127.5 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 22.5 9.32 2.41 0.0201

T 1.86 0.55 3.38 0.0016

D 2.0 0.71 2.82 0.0075

Given the above, these estimates indicate that the second quarter change in sales is

a. 22.5 units higher in the second quarter than in the other three quarters.

b. 1.86 units higher in the second quarter than in the other three quarters.

c. 2.00 units higher in the second quarter than in the other three quarters.

d. 24.5 units higher in the second quarter than in the other three quarters.

Answer: c

Difficulty: 01 Easy



Blooms: Understand



Q

t= a + bt + cD








OBSERVATIONS: 43 0.8644 127.5 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 22.5 9.32 2.41 0.0201

T 1.86 0.55 3.38 0.0016

D 2.0 0.71 2.82 0.0075

Given the above, what is the estimated intercept of the trend line in the second quarter?

a. 22.50

b. 24.50

c. 24.36

d. 2.00


Answer: b

Difficulty: 01 Easy



Blooms: Understand



Q

t= a + bt + cD






OBSERVATIONS: 43 0.8644 127.5 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 22.5 9.32 2.41 0.0201

T 1.86 0.55 3.38 0.0016

D 2.0 0.71 2.82 0.0075

Given the above, what is the estimated intercept of the trend line in the third quarter?

a. 22.50

b. 24.50

c. 24.36

d. 2.00


Answer: a



Difficulty: 01 Easy



Blooms: Understand



Q

t= a + bt + cD






OBSERVATIONS: 43 0.8644 127.5 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 22.5 9.32 2.41 0.0201

T 1.86 0.55 3.38 0.0016

D 2.0 0.71 2.82 0.0075

Using the estimated trend line above, what is the predicted level of sales in 2015IV ?

a. 110.06

b. 106.20

c. 104.34

d. 102.2


Answer: c



AACSB: Analytic

Blooms: Apply



Q

t= a + bt + cD








OBSERVATIONS: 43 0.8644 127.5 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 22.5 9.32 2.41 0.0201

T 1.86 0.55 3.38 0.0016

D 2.0 0.71 2.82 0.0075

Using the estimated trend line above, what is the predicted level of sales in 2016I ?

a. 110.06

b. 106.20

c. 104.34

d. 102.2


Answer: b



AACSB: Analytic

Blooms: Apply


7-48 Problems in forecasting include:

a. estimates becoming more reliable the further you forecast into the future

b. specification error

c. cyclical variation

d. both b and c

e. all of the above

Answer: d


Topic: Some Final Warnings


Blooms: Understand




7-49 A forecaster used the regression equation

Q

t= a + bt + c

1D

1+ c

2D

2+ c

3D

3

and quarterly sales data for 1996I–2013IV (t = 1, ..., 64) for an appliance manufacturer to obtain

the results shown below. Q is quarterly sales, and D

1, D

2and

D

3are dummy variables for quarters

I, II, and III.


OBSERVATIONS: 64 0.8768 107.982 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 30.0 12.8 2.34 0.0224

T 1.5 0.70 2.14 0.0362

D1 10.0 3.0 3.33 0.0015

D2 25.0 7.2 3.47 0.0010

D3 40.0 15.8 2.53 0.0140

At the 5 percent level of significance, is there a statistically significant trend in sales?

a. No, because 1.5 < 2.66.

b. No, because 1.5 < 2.00.

c. No, because 2.14 < 2.66.

d. Yes, because 2.14 > 2.00.


Answer: d



AACSB: Analytic

Blooms: Apply



Q

t= a + bt + c

1D

1+ c

2D

2+ c

3D

3



1, D

2and

D


I, II, and III.




OBSERVATIONS: 64 0.8768 107.982 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 30.0 12.8 2.34 0.0224

T 1.5 0.70 2.14 0.0362

D1 10.0 3.0 3.33 0.0015

D2 25.0 7.2 3.47 0.0010

D3 40.0 15.8 2.53 0.0140

At the 5 percent level of significance, is there a statistically significant trend in sales?

a. Yes, because 0.0362 < 0.05.

b. No, because 0.0362 > 0.01.

c. Yes, because 0.700 > 0.05.

d. Yes, because 2.14 >0.05.

e. both c and d

Answer: a



AACSB: Analytic

Blooms: Apply



Q

t= a + bt + c

1D

1+ c

2D

2+ c

3D

3



1, D

2and

D


I, II, and III.


OBSERVATIONS: 64 0.8768 107.982 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 30.0 12.8 2.34 0.0224

T 1.5 0.70 2.14 0.0362

D1 10.0 3.0 3.33 0.0015

D2 25.0 7.2 3.47 0.0010

D3 40.0 15.8 2.53 0.0140

The estimated QUARTERLY increase in sales is ______ units, and the estimated ANNUAL

increase in sales is ______ units.

a. 1.5; 6

b. 1.4; 4

c. 30; 4

d. 1.5; 40




Answer: a



AACSB: Analytic

Blooms: Apply



Q

t= a + bt + c

1D

1+ c

2D

2+ c

3D

3



1, D

2and

D


I, II, and III.


OBSERVATIONS: 64 0.8768 107.982 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 30.0 12.8 2.34 0.0224

T 1.5 0.70 2.14 0.0362

D1 10.0 3.0 3.33 0.0015

D2 25.0 7.2 3.47 0.0010

D3 40.0 15.8 2.53 0.0140

What is the estimated intercept of the trend line in the second quarter?

a. 25

b. 26.6

c. 55

d. 65


Answer: c



AACSB: Analytic

Blooms: Apply





Q

t= a + bt + c

1D

1+ c

2D

2+ c

3D

3



1, D

2and

D


I, II, and III.


OBSERVATIONS: 64 0.8768 107.982 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 30.0 12.8 2.34 0.0224

T 1.5 0.70 2.14 0.0362

D1 10.0 3.0 3.33 0.0015

D2 25.0 7.2 3.47 0.0010

D3 40.0 15.8 2.53 0.0140

What is the estimated intercept of the trend line in the fourth quarter?

a. 0

b. 40

c. 55

d. 70


Answer: e



AACSB: Analytic

Blooms: Apply





Q

t= a + bt + c

1D

1+ c

2D

2+ c

3D

3



1, D

2and

D


I, II, and III.


OBSERVATIONS: 64 0.8768 107.982 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 30.0 12.8 2.34 0.0224

T 1.5 0.70 2.14 0.0362

D1 10.0 3.0 3.33 0.0015

D2 25.0 7.2 3.47 0.0010

D3 40.0 15.8 2.53 0.0140

Using a 5 percent significance level, these estimation results indicate that sales in

a. the first quarter are greater than sales in any other quarter.

b. the second quarter are greater than sales in any other quarter.

c. the third quarter are greater than sales in any other quarter.

d. the fourth quarter are greater than sales in any other quarter.

Answer: c

Difficulty: 01 Easy



Blooms: Understand



Q

t= a + bt + c

1D

1+ c

2D

2+ c

3D

3



1, D

2and

D


I, II, and III.




OBSERVATIONS: 64 0.8768 107.982 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 30.0 12.8 2.34 0.0224

T 1.5 0.70 2.14 0.0362

D1 10.0 3.0 3.33 0.0015

D2 25.0 7.2 3.47 0.0010

D3 40.0 15.8 2.53 0.0140

In any given year, quarterly sales tend to vary as follows:

a. QI > QII > QIII > QIV

b. QI > QII > QIV > QIII

c. QII > QIII > QIV > QI

d. QIII > QII > QI > QIV

e. QIII > QIV > QII > QI

Answer: d




Blooms: Understand



Q

t= a + bt + c

1D

1+ c

2D

2+ c

3D

3



1, D

2and

D


I, II, and III.


OBSERVATIONS: 64 0.8768 107.982 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 30.0 12.8 2.34 0.0224

T 1.5 0.70 2.14 0.0362

D1 10.0 3.0 3.33 0.0015

D2 25.0 7.2 3.47 0.0010

D3 40.0 15.8 2.53 0.0140

Using the estimation results given above, the predicted level of sales in 2014I is _______ units.

a. 137.5

b. 139

c. 133.5

d. 132




Answer: a



AACSB: Analytic

Blooms: Apply



Q

t= a + bt + c

1D

1+ c

2D

2+ c

3D

3



1, D

2and

D


I, II, and III.


OBSERVATIONS: 64 0.8768 107.982 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 30.0 12.8 2.34 0.0224

T 1.5 0.70 2.14 0.0362

D1 10.0 3.0 3.33 0.0015

D2 25.0 7.2 3.47 0.0010

D3 40.0 15.8 2.53 0.0140

Using the estimation results given above, the predicted level of sales in 2014II is _______ units.

a. 127.5

b. 137.5

c. 154

d. 155.5


Answer: c




Blooms: Understand





Q

t= a + bt + c

1D

1+ c

2D

2+ c

3D

3



1, D

2and

D


I, II, and III.


OBSERVATIONS: 64 0.8768 107.982 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 30.0 12.8 2.34 0.0224

T 1.5 0.70 2.14 0.0362

D1 10.0 3.0 3.33 0.0015

D2 25.0 7.2 3.47 0.0010

D3 40.0 15.8 2.53 0.0140

Using the estimation results given above, the predicted level of sales in 2014III is _______ units.

a. 141.5

b. 156

c. 172

d. 173.5


Answer: e



AACSB: Analytic

Blooms: Apply





Q

t= a + bt + c

1D

1+ c

2D

2+ c

3D

3



1, D

2and

D


I, II, and III.


OBSERVATIONS: 64 0.8768 107.982 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 30.0 12.8 2.34 0.0224

T 1.5 0.70 2.14 0.0362

D1 10.0 3.0 3.33 0.0015

D2 25.0 7.2 3.47 0.0010

D3 40.0 15.8 2.53 0.0140

Using the estimation results given above, the predicted level of sales in 2014IV is _______ units.

a. 125

b. 127.50

c. 132

d. 133.5


Answer: c



AACSB: Analytic

Blooms: Apply


7-60 The manufacturer of Beanie Baby dolls used quarterly price data for 2005I - 2013IV (t = 1, ..., 36)

and the regression equation

P

t= a + bt + c

1D1

t+ c

2D2

t+ c

3D3

t

to forecast doll prices in the year 2014. P

t is the quarterly price of dolls, and

D1

t, D2

t,and

D3

tare

dummy variables for quarters I, II, and III, respectively.



DEPENDENT VARIABLE: PT R−SQUARE F−RATIO P−VALUE ON F

OBSERVATIONS: 36 0.9078 76.34 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 24.0 6.20 3.87 0.0005

T 0.800 0.240 3.33 0.0022

D1 −8.0 2.60 −3.08 0.0043

D2 −6.00 1.80 −3.33 0.0022

D3 −4.0 0.60 −6.67 0.0001

At the 2 percent level of statistical significance, is there a statistically significant trend in the price

of dolls?

a. Yes, because 0.0022 < 0.02.

b. No, because 0.0022 > 0.02.

c. Yes, because 0.800 > 0.02.

d. Yes, because 0.240 > 0.02.

e. Yes, because 3.33 > 0.02.

Answer: a

Difficulty: 01 Easy


AACSB: Analytic

Blooms: Apply




P

t= a + bt + c

1D1

t+ c

2D2

t+ c

3D3

t



D1

t, D2

t,and

D3

tare



OBSERVATIONS: 36 0.9078 76.34 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 24.0 6.20 3.87 0.0005

T 0.800 0.240 3.33 0.0022

D1 −8.0 2.60 −3.08 0.0043

D2 −6.00 1.80 −3.33 0.0022

D3 −4.0 0.60 −6.67 0.0001

The estimated QUARTERLY increase in price is ______, and the estimated ANNUAL increase

in price is ______ .

a. $1.50; $6.00

b. $1.40; $4.00



c. $0.60; $2.40

d. $0.80; $3.20


Answer: d



AACSB: Analytic

Blooms: Apply




P

t= a + bt + c

1D1

t+ c

2D2

t+ c

3D3

t



D1

t, D2

t,and

D3

tare



OBSERVATIONS: 36 0.9078 76.34 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 24.0 6.20 3.87 0.0005

T 0.800 0.240 3.33 0.0022

D1 −8.0 2.60 −3.08 0.0043

D2 −6.00 1.80 −3.33 0.0022

D3 −4.0 0.60 −6.67 0.0001

What is the estimated intercept of the trend line in the 1st quarter?

a. 24

b. −8

c. 32

d. 16


Answer: d

Difficulty: 01 Easy


AACSB: Analytic

Blooms: Apply




P

t= a + bt + c

1D1

t+ c

2D2

t+ c

3D3

t





D1

t, D2

t,and

D3

tare



OBSERVATIONS: 36 0.9078 76.34 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 24.0 6.20 3.87 0.0005

T 0.800 0.240 3.33 0.0022

D1 −8.0 2.60 −3.08 0.0043

D2 −6.00 1.80 −3.33 0.0022

D3 −4.0 0.60 −6.67 0.0001

What is the estimated intercept of the trend line in the 4th quarter?

a. 22.8

b. 16

c. 18

d. 20


Answer: e



AACSB: Analytic

Blooms: Apply




P

t= a + bt + c

1D1

t+ c

2D2

t+ c

3D3

t



D1

t, D2

t,and

D3

tare



OBSERVATIONS: 36 0.9078 76.34 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 24.0 6.20 3.87 0.0005

T 0.800 0.240 3.33 0.0022

D1 −8.0 2.60 −3.08 0.0043

D2 −6.00 1.80 −3.33 0.0022

D3 −4.0 0.60 −6.67 0.0001



At the 2 percent level of statistical significance, the estimation results indicate that price in the

________ quarter is significantly higher than in any other quarter.

a. 1st

b. 2nd

c. 3rd

d. 4th

Answer: d



AACSB: Analytic

Blooms: Apply




P

t= a + bt + c

1D1

t+ c

2D2

t+ c

3D3

t



D1

t, D2

t,and

D3

tare



OBSERVATIONS: 36 0.9078 76.34 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 24.0 6.20 3.87 0.0005

T 0.800 0.240 3.33 0.0022

D1 −8.0 2.60 −3.08 0.0043

D2 −6.00 1.80 −3.33 0.0022

D3 −4.0 0.60 −6.67 0.0001

At the 2 percent level of statistical significance, the results indicate that price in the ________

quarter is significantly lower than in any other quarter.

a. 1st

b. 2nd

c. 3rd

d. 4th

Answer: a



AACSB: Analytic

Blooms: Apply




P

t= a + bt + c

1D1

t+ c

2D2

t+ c

3D3

t





D1

t, D2

t,and

D3

tare



OBSERVATIONS: 36 0.9078 76.34 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 24.0 6.20 3.87 0.0005

T 0.800 0.240 3.33 0.0022

D1 −8.0 2.60 −3.08 0.0043

D2 −6.00 1.80 −3.33 0.0022

D3 −4.0 0.60 −6.67 0.0001

In any given year price tends to vary from quarter to quarter as follows:

a. PI > PII > PIII > PIV

b. PI > PIV > PIII > PII

c. PII > PIII > PIV > PI

d. PIII > PI > PII > PIV

e. PIV > PIII > PII > PI

Answer: e



AACSB: Analytic

Blooms: Apply




P

t= a + bt + c

1D1

t+ c

2D2

t+ c

3D3

t



D1

t, D2

t,and

D3

tare





OBSERVATIONS: 36 0.9078 76.34 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 24.0 6.20 3.87 0.0005

T 0.800 0.240 3.33 0.0022

D1 −8.0 2.60 −3.08 0.0043

D2 −6.00 1.80 −3.33 0.0022

D3 −4.0 0.60 −6.67 0.0001

Using the estimated time-series regression, predicted price in the 1st quarter of 2014 is

a. $53.60.

b. $45.60.

c. $56.00.

d. $37.60.


Answer: b



AACSB: Analytic

Blooms: Apply




P

t= a + bt + c

1D1

t+ c

2D2

t+ c

3D3

t



D1

t, D2

t,and

D3

tare



OBSERVATIONS: 36 0.9078 76.34 0.0001

VARIABLE

PARAMETER ESTIMATE

STANDARD ERROR

T−RATIO

P−VALUE

INTERCEPT 24.0 6.20 3.87 0.0005

T 0.800 0.240 3.33 0.0022

D1 −8.0 2.60 −3.08 0.0043

D2 −6.00 1.80 −3.33 0.0022

D3 −4.0 0.60 −6.67 0.0001

Using the estimated time-series regression, predicted price in the 2nd quarter of 2014 is

a. $48.40

b. $54.40

c. $40.40



d. $51.40


Answer: a



AACSB: Analytic

Blooms: Apply


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Chapter 7: EMPIRICAL DEMAND FUNCTIONS...Chapter 7: DEMAND ESTIMATION AND FORECASTING © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor