Problem: The MacWend Drive-In has determined that demand for hamburgers is given by the following equation:
Q = 205.2 + 23.0A – 200.0PM + 100.0PC + 0.5I
(1.85) (2.64) (-5.61) (2.02) (4.25)
where Q is the number of hamburgers sold per month (in 1,000s), A is the advertising expenditures during the previous month (in $1,000), PM is the price of MacWend burgers (dollars), PC is the price of hamburgers of the company’s major competitor (dollars), and I is income per capita in the surrounding community (in $1,000). The t-statistics for each coefficient is shown in parentheses below each coefficient.
Q1. How would you interpret the value for each independent variable’s coefficient estimate?
Q2. Are the signs of the individual coefficients consistent with predictions from economic theory? Explain.
Q3. If A = $5,000, PM = $1, PC = $1.20, and I = $20,000, how many hamburgers will be demanded?
Q4. What is the advertising elasticity at A = $5,000?