An MBA student has proposed the following demand equation for good Y.
QdY = a + b PY + c M
Where: QdY = quantity demanded of good Y in millions of tons per year
PY = Price of good Y in dollars per ton
M = Average consumer income in thousands of dollars
i. What sign should this student expect a, b, and c to have? Explain.
The regression output from the computer is as follows:
Dependent Variable: QdY R-Square F-ratio p-value on F
Observations: 90 .4 12.84 0.015
Variable Parameter Estimate Standard Error T-ratio P-Value
Intercept 60.00 5468.32 3.12 0.0082
PY -2.00 0.65 -2.86 0.0145
M 0.01 3.29 4.12 0.1831
This economist is comfortable using parameter estimates that are statistically significant at the 10 percent level or better.
ii. Does PY have a statistically significant effect on the quantity demanded of good Y? Explain, using the appropriate p-value.
iii. Does M have a statistically significant effect on the quantity demanded of good Y? Explain, using the appropriate p-value.
iv. What fraction of the total variation in the quantity demanded of good Y remains unexplained? What can the student do to increase the explanatory power of his demand equation? What other variables might he add to his demand equation?
v. What is the expected quantity demanded of good y when PY = 100 and M = 20,000?