An electric holding company is interested in the possible acquisition of other "electricity retailers" expected to be spun off as the industry is deregulated. As the project point person you have been asked to do some preliminary demand analysis in order to better understand this particular market. The firm hired a consultant to collect average values from each of the fifty US states and to generate a cross-sectional demand model.
The final estimated demand function was provided by the consultant as:
Qd = 36,314.7 - 9,937.78 * [Price] + .0889 * [Income] + .021 * [Customers] + 2,197.78 * [Price of Natural Gas]
1. Ignoring the intercept, which of the variables appears to be the least significantly different from zero?
a .Own Price
b. Price of Natural Gas
c. Customers
d. Income
2. Which of the following most likely represents the upper 95% confidence limit for when estimating of sales?
a. 28,575 (i.e., the sum of the parameter estimates)
b. 23,710 (i.e. double the standard error estimates)
c. 11,855 (i.e., the standard error estimates)
d. 16,759 (i.e. the sum of the parameter standard error estimates)
3. Estimate the (own) price elasticity (of demand). Assume the following: own price is $3, income is $60,000, the market has 2,000,000 potential customers and the price of natural gas is $4. (The following numbers are absolute values.)
a. .49
b. .60
c. .0001
d. 9936
4 Assuming price is $3, income is $60,000, the market has 2,000,000 potential customers, and the price of natural gas is $4, estimate the cross-price elasticity (of demand).
a. .14
b. .35
c. .80
d. 2197.78
5 Which of the following statements best describes the retail market for electricity?
a. The electricity market is not highly price sensitive
b. Electricity is a normal good.
c. A rise in the price of electricity will increase firm revenues.
d. All of the above
6 Which of the following statements best describes the retail market for electricity?
a. Natural Gas may be a weak substitute for electricity due to the relatively small parameter value.
b. Natural Gas may be a strong substitute for electricity due to the relatively large parameter value.
c. Natural Gas may be a weak substitute for electricity due to wide confidence range.
d. Natural Gas and Electricity are complements